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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

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<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B>As filed with the Securities and Exchange Commission on
    April&#160;8, 2010</B>
</DIV>

<DIV align="right" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B>Registration
    <FONT style="white-space: nowrap">No.&#160;333-&#160;&#160;&#160;&#160;&#160;</FONT></B>
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    <B><FONT style="font-size: 14pt">UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION<BR>
    </FONT><FONT style="font-size: 12pt">Washington,&#160;D.C.
    20549</FONT></B>
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    <B><FONT style="font-size: 18pt"><FONT style="white-space: nowrap">Form&#160;S-1</FONT></FONT></B>
</DIV>

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    <B><FONT style="font-size: 12pt">REGISTRATION STATEMENT<BR>
    UNDER<BR>
    THE SECURITIES ACT OF 1933</FONT></B>
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    <B><FONT style="font-size: 24pt">KIPS BAY MEDICAL,
    INC.</FONT></B>
</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I><FONT style="font-size: 8pt">(Exact name of registrant as
    specified in its charter)</FONT></I>
</DIV>

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    <B>Delaware<BR>
    </B><I><FONT style="font-size: 8pt">(State or other jurisdiction
    of<BR>
    incorporation or organization)</FONT></I>
</TD>
<TD>
&nbsp;
</TD>
<TD align="center" valign="top">
    <B>3841<BR>
    </B><I><FONT style="font-size: 8pt">(Primary Standard
    Industrial<BR>
    Classification Code Number)</FONT></I>
</TD>
<TD>
&nbsp;
</TD>
<TD align="center" valign="top">
    <B>20-8947689<BR>
    </B><I><FONT style="font-size: 8pt">(I.R.S.  Employer<BR>
    Identification No.) </FONT></I>
</TD>
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    <B><FONT style="font-size: 9pt">3405 Annapolis Lane North,
    Suite&#160;200<BR>
    Minneapolis, Minnesota 55447<BR>
    <FONT style="white-space: nowrap">(763)&#160;235-3540</FONT><BR>
    </FONT></B><I><FONT style="font-size: 8pt">(Address, including
    zip code, and telephone number, including area code, of
    registrant&#146;s principal executive offices)</FONT></I>
</DIV>

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    <B><FONT style="font-size: 9pt">Manny Villafa&#241;a<BR>
    Chairman and Chief Executive Officer<BR>
    Kips Bay Medical, Inc.<BR>
    3405 Annapolis Lane North, Suite&#160;200</FONT></B>
</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B><FONT style="font-size: 9pt">Minneapolis, Minnesota 55447<BR>
    <FONT style="white-space: nowrap">(763)&#160;235-3540</FONT><BR>
    </FONT></B><I><FONT style="font-size: 8pt">(Name, address,
    including zip code, and telephone number, including area code,
    of agent for service)</FONT></I>
</DIV>

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    <B><I><FONT style="font-size: 9pt">Copies to:</FONT></I></B>
</DIV>

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    <B>Robert K. Ranum,&#160;Esq.<BR>
    Thomas Steichen,&#160;Esq.<BR>
    Alexander Rosenstein, Esq.<BR>
    Fredrikson&#160;&#038; Byron, P.A.<BR>
    200 South Sixth Street, Suite&#160;4000<BR>
    Minneapolis, Minnesota 55402<BR>
    <FONT style="white-space: nowrap">(612)&#160;492-7000</FONT></B>
</TD>
<TD>
&nbsp;
</TD>
<TD align="center" valign="top">
    <B>Frank F. Rahmani,&#160;Esq.<BR>
    John T. McKenna,&#160;Esq.<BR>
    Cooley Godward Kronish, LLP<BR>
    3175 Hanover Street<BR>
    Palo Alto, California 94304<BR>
    (650) 843-5000</B>
</TD>
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 9pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B>Approximate date of commencement of proposed sale to the
    public:</B>&#160;&#160;As soon as practicable after the
    effective date of this registration statement.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 9pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    If any of the securities being registered on this Form are to be
    offered on a delayed or continuous basis pursuant to
    Rule&#160;415 under the Securities Act of 1933, as amended,
    check the following
    box.&#160;&#160;<FONT style="font-family: Wingdings; font-variant: normal">&#111;
    </FONT>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 9pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    If this Form is filed to register additional securities for an
    offering pursuant to Rule&#160;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.&#160;&#160;<FONT style="font-family: Wingdings; font-variant: normal">&#111;
    </FONT>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 9pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    If this Form is a post-effective amendment filed pursuant to
    Rule&#160;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.&#160;&#160;<FONT style="font-family: Wingdings; font-variant: normal">&#111;
    </FONT>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 9pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    If this Form is a post-effective amendment filed pursuant to
    Rule&#160;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.&#160;&#160;<FONT style="font-family: Wingdings; font-variant: normal">&#111;
    </FONT>
</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 9pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Indicate by check mark whether the registrant is a large
    accelerated filer, an accelerated filer, a non-accelerated
    filer, or a smaller reporting company. See the definitions of
    &#147;large accelerated filer,&#148; &#147;accelerated
    filer&#148; and &#147;smaller reporting company&#148; in
    <FONT style="white-space: nowrap">Rule&#160;12b-2</FONT>
    of the Exchange Act. (Check one):
</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

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    <TD width="30%">&nbsp;</TD>	<!-- colindex=03 type=maindata -->
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<DIV style="text-indent: -9pt; margin-left: 9pt">
    Large accelerated
    filer&#160;<FONT style="font-family: Wingdings; font-variant: normal">&#111;
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="top">
    Accelerated
    filer&#160;<FONT style="font-family: Wingdings; font-variant: normal">&#111;
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD align="center" valign="top">
    Non-accelerated
    filer&#160;<FONT style="font-family: Wingdings; font-variant: normal">&#111;</FONT><BR>
    (Do not check if a smaller reporting company)
</TD>
<TD>
&nbsp;
</TD>
<TD align="center" valign="top">
    Smaller reporting
    company&#160;<FONT style="font-family: Wingdings; font-variant: normal">&#254;</FONT>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<CENTER style="font-size: 1pt; width: 15%; border-bottom: 1pt solid #000000"></CENTER>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 9pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CALCULATION
    OF REGISTRATION FEE</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 9pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
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    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=gutterright -->
    <TD width="13%">&nbsp;</TD>	<!-- colindex=02 type=maindata -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=03 type=gutterleft -->
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    <TD width="13%">&nbsp;</TD>	<!-- colindex=03 type=maindata -->
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<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom" style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 3px double #000000">
    <B>Proposed Maximum<BR>
    </B>
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 3px double #000000">
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
    <B>Title of Each Class of<BR>
    </B>
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
    <B>Aggregate<BR>
    </B>
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
    <B>Amount of<BR>
    </B>
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
    <B>Securities to be Registered</B>
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
    <B>Offering Price(1)(2)</B>
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
    <B>Registration Fee</B>
</TD>
</TR>
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<TD align="left" valign="top" style="border-top: 1px solid #000000">
<DIV style="text-indent: -9pt; margin-left: 9pt">
    Common stock, par value $0.01 per share
</DIV>
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
    $57,500,000
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
    $4,100
</TD>
</TR>
<TR style="font-size: 1pt">
<TD nowrap align="left" valign="bottom" style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom" style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom" style="border-top: 3px double #000000">
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

<TR>
    <TD width="1%"></TD>
    <TD width="1%"></TD>
    <TD width="98%"></TD>
</TR>

<TR>
    <TD align="right" valign="top">
    <FONT style="font-size: 9pt">(1)
    </FONT></TD>
    <TD></TD>
    <TD valign="bottom">
    <I><FONT style="font-size: 9pt">In accordance with
    Rule&#160;457(o) under the Securities Act of 1933, the number of
    shares being registered and the proposed maximum offering price
    per share are not included in this table. Includes the offering
    price of additional shares that the underwriters have the option
    to purchase.</FONT></I></TD>
</TR>


<TR style="line-height: 3pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD align="right" valign="top">
    <FONT style="font-size: 9pt">(2)
    </FONT></TD>
    <TD></TD>
    <TD valign="bottom">
    <I><FONT style="font-size: 9pt">Estimated solely for the purpose
    of computing the registration fee pursuant to Rule 457(o) under
    the Securities Act.</FONT></I></TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 9pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B>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&#160;8(a)
    of the Securities Act of 1933, as amended, or until the
    Registration Statement shall become effective on such date as
    the Commission, acting pursuant to said Section&#160;8(a), may
    determine.</B>
</DIV>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

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<TABLE style="color: #FF0000" width="100%" border="1" cellpadding="5"><TR><TD>
<FONT style="font-size: 9pt; font-family: Arial, Helvetica; color: #E8112D">The
information in this preliminary prospectus is not complete and
may be changed. We may not sell these securities until the
registration statement filed with Securities and Exchange
Commission is effective. This preliminary prospectus is not an
offer to sell these securities and is not soliciting an offer to
buy these securities in any state where the offer or sale is not
permitted.<BR>
</FONT>
</TD></TR></TABLE>

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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV align="right" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-size: 11pt; font-family: Arial, Helvetica; color: #E8112D">SUBJECT
    TO COMPLETION, DATED APRIL 8, 2010
    </FONT>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B><FONT style="font-size: 12pt">Preliminary
    Prospectus</FONT></B>
</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B><FONT style="font-size: 16pt; font-family: Arial, Helvetica">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;Shares</FONT></B>
</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B><FONT style="font-size: 24pt; font-family: Arial, Helvetica">Kips
    Bay Medical, Inc.</FONT></B>
</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <IMG src="c56813c5681303.gif" alt="(KIPS BAY MEDICAL, INC. LOGO)"><FONT style="font-size: 24pt">
    </FONT>
</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B><FONT style="font-size: 18pt; font-family: Arial, Helvetica">Common
    Stock</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 11pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We are
    offering&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;shares
    of our common stock. This is our initial public offering, and no
    public market currently exists for our common stock. We expect
    that the initial public offering price will be between
    $&#160;&#160;&#160;&#160;&#160; and
    $&#160;&#160;&#160;&#160;&#160; per common share. We have
    applied for listing of our common stock on the NASDAQ Global
    Market under the symbol &#147;KIPS.&#148;
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 11pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B>Investing in our common stock involves a high degree of risk.
    Please read &#147;Risk Factors&#148; beginning on
    page&#160;6.</B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 11pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B>Neither the Securities and Exchange Commission nor any state
    securities commission has approved or disapproved of these
    securities or determined if this prospectus is truthful or
    complete. Any representation to the contrary is a criminal
    offense.</B>
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 11pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="75%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="5%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="5%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="4%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="4%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="9" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="left" valign="bottom">
    <B>PER SHARE</B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>TOTAL</B>
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -11pt; margin-left: 11pt">
    Public Offering Price
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;$
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -11pt; margin-left: 11pt">
    Underwriting Discounts and Commissions
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;$
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -11pt; margin-left: 11pt">
    Proceeds to Kips Bay Medical, Inc. (Before Expenses)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;$
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="9" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 11pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Delivery of the shares of common stock is expected to be made on
    or
    about&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;,
    2010. We have granted the underwriters an option for a period of
    30&#160;days to purchase, on the same terms and conditions set
    forth above, up to an
    additional&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;shares
    of our common stock to cover overallotments. If the underwriters
    exercise the option in full, the total underwriting discounts
    and commissions payable by us will be
    $&#160;&#160;&#160;&#160;&#160; and the total proceeds to us,
    before expenses, will be $&#160;&#160;&#160;&#160;&#160;.
</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I><FONT style="font-size: 12pt">Sole Book-Running
    Manager</FONT></I>
</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-size: 16pt; font-family: Arial, Helvetica">Jefferies&#160;&#038;
    Company
    </FONT>
</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-family: Arial, Helvetica">Prospectus
    dated&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;,
    2010
    </FONT>
</DIV>
<!-- XBRL Pagebreak Begin -->

<P align="left" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 6pt"><IMG src="c56813c5681304.gif" alt="(GRAPHIC)">
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-right: 13%; margin-left: 13%">Our External Saphenous Vein Support Technology, or eSVS MESH, is a nitinol mesh sleeve that
is placed over the saphenous vein graft during
coronary artery bypass grafting, or
 CABG surgery. We believe the use of  our eSVS MESH with  saphenous vein grafts in CABG surgery could    improve
the long-term outcome of CABG procedures, including improved openness and improved
blood flow  through the saphenous vein graft, resulting in a reduced need for costly
and potentially complicated reoperations or revascularization procedures.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-right: 13%; margin-left: 13%">Caution: Investigational device. Limited by law to investigational use and not approved for
commercial sale by any regulatory agency.
</DIV>



<P align="center" style="font-size: 10pt"><!-- Folio --><!-- /Folio -->
</DIV>




<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<CENTER style="font-size: 1pt; width: 100%; border-bottom: 1pt solid #000000"></CENTER>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Table of
    Contents</FONT></B>
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>
<DIV align="left">
<!-- TOC -->
</DIV>

<DIV align="left">
<A name="tocpage"></A>
</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 9pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="98%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=quadleft -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=maindata -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=quadright -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<!-- TableOutputBody -->
<TR valign="bottom">
<TD nowrap align="left" valign="bottom" style="font-family: Arial, Helvetica">
<DIV style="text-indent: -9pt; margin-left: 9pt">
    <A HREF='#101'>Prospectus Summary</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom" style="font-family: Arial, Helvetica">
    1
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom" style="font-family: Arial, Helvetica">
<DIV style="text-indent: -9pt; margin-left: 9pt">
    <A HREF='#102'>Risk Factors</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom" style="font-family: Arial, Helvetica">
    6
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom" style="font-family: Arial, Helvetica">
<DIV style="text-indent: -9pt; margin-left: 9pt">
    <A HREF='#103'>Special Note Regarding Forward-Looking
    Statements</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom" style="font-family: Arial, Helvetica">
    21
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom" style="font-family: Arial, Helvetica">
<DIV style="text-indent: -9pt; margin-left: 9pt">
    <A HREF='#104'>Use of Proceeds</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom" style="font-family: Arial, Helvetica">
    22
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom" style="font-family: Arial, Helvetica">
<DIV style="text-indent: -9pt; margin-left: 9pt">
    <A HREF='#105'>Dividend Policy</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom" style="font-family: Arial, Helvetica">
    22
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom" style="font-family: Arial, Helvetica">
<DIV style="text-indent: -9pt; margin-left: 9pt">
    <A HREF='#106'>Capitalization</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom" style="font-family: Arial, Helvetica">
    23
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom" style="font-family: Arial, Helvetica">
<DIV style="text-indent: -9pt; margin-left: 9pt">
    <A HREF='#107'>Dilution</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom" style="font-family: Arial, Helvetica">
    24
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom" style="font-family: Arial, Helvetica">
<DIV style="text-indent: -9pt; margin-left: 9pt">
    <A HREF='#108'>Selected Financial Data</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom" style="font-family: Arial, Helvetica">
    26
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom" style="font-family: Arial, Helvetica">
<DIV style="text-indent: -9pt; margin-left: 9pt">
    <A HREF='#109'>Management&#146;s Discussion and Analysis of
    Financial Condition and Results of Operations</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom" style="font-family: Arial, Helvetica">
    27
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom" style="font-family: Arial, Helvetica">
<DIV style="text-indent: -9pt; margin-left: 9pt">
    <A HREF='#110'>Business</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom" style="font-family: Arial, Helvetica">
    38
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom" style="font-family: Arial, Helvetica">
<DIV style="text-indent: -9pt; margin-left: 9pt">
    <A HREF='#111'>Management</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom" style="font-family: Arial, Helvetica">
    58
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom" style="font-family: Arial, Helvetica">
<DIV style="text-indent: -9pt; margin-left: 9pt">
    <A HREF='#112'>Director Compensation</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom" style="font-family: Arial, Helvetica">
    62
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom" style="font-family: Arial, Helvetica">
<DIV style="text-indent: -9pt; margin-left: 9pt">
    <A HREF='#113'>Executive Compensation</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom" style="font-family: Arial, Helvetica">
    63
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom" style="font-family: Arial, Helvetica">
<DIV style="text-indent: -9pt; margin-left: 9pt">
    <A HREF='#114'>Certain Relationships and Related Party
    Transactions</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom" style="font-family: Arial, Helvetica">
    70
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom" style="font-family: Arial, Helvetica">
<DIV style="text-indent: -9pt; margin-left: 9pt">
    <A HREF='#115'>Principal Stockholders</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom" style="font-family: Arial, Helvetica">
    72
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom" style="font-family: Arial, Helvetica">
<DIV style="text-indent: -9pt; margin-left: 9pt">
    <A HREF='#116'>Description of Common Stock</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom" style="font-family: Arial, Helvetica">
    73
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom" style="font-family: Arial, Helvetica">
<DIV style="text-indent: -9pt; margin-left: 9pt">
    <A HREF='#117'>Shares&#160;Eligible for Future Sale</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom" style="font-family: Arial, Helvetica">
    77
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom" style="font-family: Arial, Helvetica">
<DIV style="text-indent: -9pt; margin-left: 9pt">
    <A HREF='#118'>Underwriting</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom" style="font-family: Arial, Helvetica">
    79
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom" style="font-family: Arial, Helvetica">
<DIV style="text-indent: -9pt; margin-left: 9pt">
    <A HREF='#119'>Material United States Federal Tax Considerations
    for <FONT style="white-space: nowrap">Non-U.S.</FONT>
    Holders of Common Stock</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom" style="font-family: Arial, Helvetica">
    84
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom" style="font-family: Arial, Helvetica">
<DIV style="text-indent: -9pt; margin-left: 9pt">
    <A HREF='#120'>Legal Matters</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom" style="font-family: Arial, Helvetica">
    87
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom" style="font-family: Arial, Helvetica">
<DIV style="text-indent: -9pt; margin-left: 9pt">
    <A HREF='#121'>Experts</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom" style="font-family: Arial, Helvetica">
    87
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom" style="font-family: Arial, Helvetica">
<DIV style="text-indent: -9pt; margin-left: 9pt">
    <A HREF='#122'>Where You Can Find More Information</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom" style="font-family: Arial, Helvetica">
    87
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom" style="font-family: Arial, Helvetica">
<DIV style="text-indent: -9pt; margin-left: 9pt">
    <A HREF='#123'>Index to Financial Statements</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom" style="font-family: Arial, Helvetica">
    F-1
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD colspan="5" valign="bottom" style="font-family: Arial, Helvetica">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD colspan="5" style="border-top: 1px solid #000000">
&nbsp;
</TD>
</TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="c56813exv3w1.htm">EX-3.1</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="c56813exv3w2.htm">EX-3.2</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="c56813exv10w1.htm">EX-10.1</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="c56813exv10w2.htm">EX-10.2</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="c56813exv10w3.htm">EX-10.3</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="c56813exv10w4.htm">EX-10.4</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="c56813exv10w5.htm">EX-10.5</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="c56813exv10w6.htm">EX-10.6</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="c56813exv10w7.htm">EX-10.7</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="c56813exv10w8.htm">EX-10.8</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="c56813exv10w9.htm">EX-10.9</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="c56813exv10w10.htm">EX-10.10</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="c56813exv10w11.htm">EX-10.11</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="c56813exv10w12.htm">EX-10.12</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="c56813exv10w13.htm">EX-10.13</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="c56813exv10w15.htm">EX-10.15</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="c56813exv10w16.htm">EX-10.16</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="c56813exv10w17.htm">EX-10.17</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="c56813exv10w18.htm">EX-10.18</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="c56813exv10w19.htm">EX-10.19</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="c56813exv10w20.htm">EX-10.20</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="c56813exv10w21.htm">EX-10.21</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="c56813exv23w1.htm">EX-23.1</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="c56813exv99w1.htm">EX-99.1</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="c56813exv99w2.htm">EX-99.2</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="c56813exv99w3.htm">EX-99.3</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="c56813exv99w4.htm">EX-99.4</A></FONT></TD></TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV align="left">
<!-- /TOC -->
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B>Until&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;,
    2010 (25&#160;days after the date of this prospectus), all
    dealers that buy, sell, or trade the common shares, whether or
    not participating in this offering, may be required to deliver a
    prospectus. This is in addition to the dealers&#146; obligation
    to deliver a prospectus when acting as underwriters and with
    respect to their unsold allotments or subscriptions.</B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have not authorized anyone to give any information or to make
    any representations other than those contained in this
    prospectus. Do not rely upon any information or representations
    made outside of this prospectus. This prospectus is not an offer
    to sell, and it is not soliciting an offer to buy, (1)&#160;any
    securities other than our common shares or (2)&#160;our common
    shares in any circumstances in which our offer or solicitation
    is unlawful. The information contained in this prospectus may
    change after the date of this prospectus. Do not assume after
    the date of this prospectus that the information contained in
    this prospectus is still correct.
</DIV>
<!-- XBRL Pagebreak Begin -->

<P align="left" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->
<DIV style="width: 100%; height: 9in; border-top: 1px solid #000000; padding-top: 12pt; border-right: 1px solid #000000; padding-right: 12pt; border-bottom: 1px solid #000000; padding-bottom: 12pt; border-left: 1px solid #000000; padding-left: 12pt"><!-- Begin box 1 -->

<A name='101'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Prospectus
    Summary</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>This summary highlights certain information about us, this
    offering and selected information contained in the prospectus.
    This summary is not complete and does not contain all of the
    information that you should consider before deciding whether to
    invest in our common stock. For a more complete understanding of
    our company and this offering, we encourage you to read and
    consider the more detailed information in the prospectus,
    including &#147;Risk Factors&#148; and the financial statements
    and related notes. Unless we specify otherwise, all references
    in this prospectus to &#147;Kips Bay,&#148; &#147;we,&#148;
    &#147;our,&#148; &#147;us&#148; and &#147;our company&#148;
    refer to Kips Bay Medical, Inc.</I>
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Overview</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We are a medical device company focused on developing,
    manufacturing and commercializing our innovative external
    saphenous vein support technology, or eSVS MESH, for use in
    coronary artery bypass grafting, or CABG, surgery. Our eSVS MESH
    is a nitinol mesh sleeve that, when placed over a saphenous vein
    graft during CABG surgery, is designed to improve the structural
    characteristics and long-term performance of the vein graft.
    Based on the data collected in a 90&#160;patient multi-center
    clinical trial conducted outside the United States, we submitted
    our CE Mark application in February 2010. We expect to receive
    CE Mark approval and begin marketing our eSVS MESH in select
    European Union markets in the second half of 2010. The United
    States Food and Drug Administration, or FDA, is reviewing our
    application for an investigational device exemption, or IDE,
    which, if granted, will allow us to begin clinical trials of our
    eSVS MESH in the United States. We anticipate beginning
    enrollment in a United States IDE trial in the second half of
    2010. Currently, we have no products available for commercial
    sale and to date we have not generated any revenue from the sale
    of products.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Industry
    Background</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    According to the American Heart Association, approximately
    17.6&#160;million people in the United States have coronary
    artery disease, and approximately 587,000&#160;people in the
    United States die each year as a result of the disease. In
    addition, according to a 2007 World Health Organization report,
    approximately 7.2&#160;million people worldwide died of coronary
    heart disease in 2002. Physicians and patients may select among
    a variety of treatments to address coronary artery disease,
    including pharmaceutical therapy, balloon angioplasty, stenting
    with bare metal or drug-eluting stents, and CABG procedures,
    with the selection often depending upon the stage of the disease
    and the age of the patient.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    CABG is one of the most commonly performed surgeries in the
    United States, with the American Heart Association estimating
    that 448,000 were performed in the United States in 2006. In
    addition, the Millennium Research Group, an independent market
    research firm, estimates that there will be 165,000 CABG
    procedures in Europe per year by 2013. An independent study
    comparing CABG and implantation of drug-eluting stents shows
    that CABG is the more effective long-term treatment for coronary
    artery disease, achieving the best long-term patient outcomes as
    measured by survival rate and need for re-intervention
    12&#160;months after surgery. Moreover, patients with severe and
    multi-vessel coronary artery disease often cannot be effectively
    treated with methods other than CABG. According to the
    Millennium Research Group, moderate growth in CABG procedures is
    expected in the United States through 2012 and in Europe through
    2013, largely due to the increase in procedure volumes caused by
    rising rates of coronary disease and the need for repeat
    revascularizations.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In CABG procedures, surgeons harvest blood vessels, including
    the internal mammary artery from the chest and the saphenous
    vein from the leg, and attach the harvested vessels to bypass,
    or provide blood flow around, blocked coronary arteries. The
    effectiveness of the procedure, however, is often limited by the
    failure rate of saphenous vein grafts, which has been shown in
    various studies to range from 6% to 30% one year after surgery
    and 60% ten years after surgery. Failure of these grafts,
    typically evidenced by partial or complete blockage and reduced
    or stopped blood flow, can lead to the need for further coronary
    interventions up to and including additional CABG procedures. We
    believe the use of our eSVS MESH with saphenous vein grafts in
    CABG surgery could improve the long-term outcome of CABG
    procedures, including improved openness, or patency, and
    improved blood flow through the saphenous vein graft, resulting
    in a reduced need for costly and potentially complicated
    reoperations or revascularization procedures.
</DIV>
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<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">1</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<DIV style="width: 100%; height: 9in; border-top: 1px solid #000000; padding-top: 12pt; border-right: 1px solid #000000; padding-right: 12pt; border-bottom: 1px solid #000000; padding-bottom: 12pt; border-left: 1px solid #000000; padding-left: 12pt"><!-- Begin box 1 -->
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    According to results published in the European Journal of
    Cardio-Thoracic Surgery in 2009, each CABG procedure involves an
    average of 3.3 bypass grafts, typically consisting of the left
    internal mammary artery, or LIMA, for one graft and the
    saphenous vein for the remaining 2.3 grafts per procedure. Some
    of the main advantages of using the saphenous vein include its
    ease of accessibility, its ease of handling, and the number of
    grafts, typically three, that can be constructed from a single
    vein. Despite these advantages and the widespread use of
    saphenous veins in CABG surgery, saphenous vein grafts fail more
    frequently than LIMA grafts due to differences in structure and
    size of saphenous vein grafts as compared to LIMA grafts. Unlike
    the LIMA, which is a thick-walled artery intended to handle the
    high pressure blood flow from the heart, saphenous veins are
    thin-walled vessels that are intended for a low-pressure venous
    environment. Saphenous veins are also typically larger than the
    coronary arteries to which they are attached and this difference
    in size slows blood flow, adding stress to the vessel wall and
    increasing the risk of thrombosis, or blood clotting. When the
    vein grafts used to bypass a blocked artery are exposed to the
    high pressure of arterial flow, there is significant stress on
    the thin wall of the veins. The vein responds to this injury by
    causing its walls to thicken in a manner that often leads to
    failure of the bypass graft.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Our
    Solution</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our eSVS MESH is designed to address these limitations by
    providing the vein graft with physiological attributes similar
    to those of an artery by constricting the vein and preventing
    expansion of the vein graft and resulting injury due to
    increased pressure.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We believe the key benefits of our eSVS MESH technology include:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    Structural support designed to inhibit vessel expansion and
    resulting damage to the vessel, which can prevent a thickening
    of the vessel wall over time, or hyperplasia, and resulting
    graft failure.
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    Radial constriction designed to cause the diameter of the graft,
    or lumen, to be consistent in size and more closely match the
    diameter of the target coronary artery to which it is attached,
    thereby increasing blood flow velocities, reducing the potential
    for clot formation, and inhibiting vein wall thickening.
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    Compatibility with current CABG procedures, including on-pump or
    off-pump procedures, and open or endoscopic vein harvest
    methods. Except for the placement of our eSVS MESH on the
    saphenous vein graft, the surgical steps to use a saphenous vein
    graft with our eSVS MESH are the same as would be performed for
    any coronary artery bypass procedure utilizing unsupported
    saphenous vein grafts. We do not expect, nor have we seen, a
    significant increase in CABG procedure time due to eSVS MESH use.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We are also pursuing additional applications for our eSVS MESH,
    including applications for use in peripheral artery bypass
    surgery, for use with coronary allografts, and for use in
    arteriovenous, or AV, fistula dialysis applications.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Clinical
    Development of Our eSVS MESH</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have completed enrollment in a 90&#160;patient multi-center
    clinical trial conducted outside the United States. The primary
    effectiveness endpoint of this trial is statistical
    non-inferiority of the patency of eSVS MESH vessels as compared
    to control vessels at nine-months post-implant. Effectiveness
    data, which is based on angiographic patency, is being collected
    at this time. Preliminary safety data has indicated that our
    eSVS MESH and implant procedure do not result in an increase in
    patient complications during or after surgery. We completed
    enrollment in this trial in July 2009, and as of March&#160;1,
    2010, all 90&#160;patients have been implanted for six months or
    more, 83&#160;patients have been implanted for nine months or
    more, and 50 patients have been implanted for 12&#160;months or
    more. This trial formed the basis for our CE Mark application
    submitted in February 2010.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We expect to receive CE Mark approval and to begin marketing our
    eSVS MESH in select European Union markets in the second half of
    2010. The FDA is reviewing our application for an IDE, which, if
    granted, will allow us to begin clinical trials of our eSVS MESH
    in the United States. We anticipate beginning enrollment in a
    United States IDE trial in the second half of 2010. We could be
    delayed by adverse clinical results or regulatory complications,
    and we may never receive marketing approval.
</DIV>
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<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">2</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<DIV style="width: 100%; height: 9in; border-top: 1px solid #000000; padding-top: 12pt; border-right: 1px solid #000000; padding-right: 12pt; border-bottom: 1px solid #000000; padding-bottom: 12pt; border-left: 1px solid #000000; padding-left: 12pt"><!-- Begin box 1 -->
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Our
    Strategy</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our objective is to achieve significant market adoption of our
    eSVS MESH technology in CABG and other vascular applications.
    Key elements of our strategy to achieve this objective include
    the following:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    Work with respected medical centers and key thought leaders to
    demonstrate and communicate the potential benefits of our eSVS
    MESH.
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    Commercialize our eSVS MESH in select European markets.
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    Obtain regulatory approval and commercialize our eSVS MESH in
    the United States.
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    Conduct trials to expand indications for our eSVS MESH.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Risks Associated
    with Our Business</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our business is subject to a number of risks discussed under the
    heading &#147;Risk Factors&#148; and elsewhere in this
    prospectus, including, but not limited to, the following:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    We have a limited operating history, expect future losses, and
    may be unable to achieve or maintain profitability.
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    We may be unable to successfully complete our clinical trials
    and commercialize our eSVS MESH, or we may experience
    significant delays in doing so.
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    We may be unable to obtain market acceptance of our eSVS MESH.
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    Third-party payors may not provide sufficient coverage or
    reimbursement to healthcare providers for the use of our eSVS
    MESH.
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    We may be unable to protect our intellectual property rights,
    and claims of infringement or misappropriation of the
    intellectual property rights of others could prohibit us from
    commercializing our eSVS MESH.
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    We will be subject to U.S.&#160;and foreign government
    regulation.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    You should carefully consider these factors, as well as all of
    the other information set forth in this prospectus, before
    making an investment decision.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Company
    Information</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We were incorporated in Delaware in May 2007. Our principal
    executive offices are located at 3405 Annapolis Lane North,
    Suite&#160;200, Minneapolis, MN 55447. Our telephone number is
    <FONT style="white-space: nowrap">(763)&#160;235-3540,</FONT>
    and our website is www.kipsbaymedical.com. The information
    contained in or connected to our website is not incorporated by
    reference into, and should not be considered part of, this
    prospectus. Kips Bay
    Medical<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>,

    eSVS<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>,

    the Kips Bay Medical logo, and other trademarks or service marks
    of Kips Bay Medical, Inc. appearing in this prospectus are our
    property. Trade names, trademarks, and service marks of other
    companies appearing in this prospectus are the property of the
    respective holders.
</DIV>
<!-- XBRL Pagebreak Begin -->
</DIV><!-- End box 1 -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">3</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<DIV style="width: 100%; height: 9in; border-top: 1px solid #000000; padding-top: 12pt; border-right: 1px solid #000000; padding-right: 12pt; border-bottom: 1px solid #000000; padding-bottom: 12pt; border-left: 1px solid #000000; padding-left: 12pt"><!-- Begin box 1 -->
<!-- XBRL Pagebreak End -->

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">The
    Offering</FONT></B>
</DIV>

<DIV style="margin-top: 15pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

<TR>
    <TD width="36%"></TD>
    <TD width="1%"></TD>
    <TD width="63%"></TD>
</TR>

<TR>
    <TD valign="top">
    Common stock offered by us</TD>
    <TD></TD>
    <TD valign="bottom">
    &#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;shares</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD valign="top">
    Common stock to be outstanding immediately after this offering</TD>
    <TD></TD>
    <TD valign="bottom">
    &#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;shares</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Use of
    Proceeds</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We expect the net proceeds to us from this offering will be
    approximately $&#160;&#160;&#160;&#160;&#160;&#160;million,
    after deducting the estimated underwriting discounts and
    commissions and estimated offering expenses. We intend to use
    the net proceeds from this offering to seek regulatory approval
    to market our eSVS MESH in the United States and abroad,
    including human clinical trials in the United States; develop
    and test additional applications of our eSVS MESH; make certain
    milestone payments for our acquired intellectual property; and
    for working capital and general corporate purposes. See
    &#147;Use of Proceeds&#148; on page&#160;22 of this prospectus.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">NASDAQ Global
    Market Listing</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We intend to apply for the listing of our common stock on the
    Nasdaq Global Market under the symbol &#147;KIPS.&#148;
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Risk
    Factors</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Investing in our common stock involves a high degree of risk.
    See &#147;Risk Factors&#148; on page&#160;6 of this prospectus.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Outstanding
    Shares</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The number of shares of our common stock that will be
    outstanding immediately after this offering is based on
    13,581,791&#160;shares outstanding as of March&#160;1, 2010 and
    excludes:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    783,000&#160;shares of common stock issuable upon the exercise
    of outstanding stock options as of March&#160;1, 2010 at a
    weighted average exercise price of $4.01 per share; and
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    1,216,000 additional shares of common stock reserved and
    available for future issuances under our 2007 Long-Term
    Incentive Plan.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Except as otherwise noted, all information in this prospectus
    assumes no exercise of the underwriters&#146; option to purchase
    additional shares.
</DIV>
<!-- XBRL Pagebreak Begin -->
</DIV><!-- End box 1 -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">4</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<DIV style="width: 100%; height: 9in; border-top: 1px solid #000000; padding-top: 12pt; border-right: 1px solid #000000; padding-right: 12pt; border-bottom: 1px solid #000000; padding-bottom: 12pt; border-left: 1px solid #000000; padding-left: 12pt"><!-- Begin box 1 -->
<!-- XBRL Pagebreak End -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Summary Financial
    Data</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The following table summarizes our financial data. We have
    derived the statements of operations data for the period from
    May&#160;1, 2007 (inception) through December&#160;31, 2007, the
    years ended December&#160;31, 2008 and 2009, and the period from
    May&#160;1, 2007 (inception) through December&#160;31, 2009, and
    the balance sheet data as of December&#160;31, 2009 from our
    audited financial statements appearing elsewhere in this
    prospectus. Our historical results are not necessarily
    indicative of the results that may be experienced in the future.
    You should read this data in conjunction with &#147;Selected
    Financial Data,&#148; &#147;Management&#146;s Discussion and
    Analysis of Financial Condition and Results of Operations,&#148;
    and our financial statements and related notes, all included
    elsewhere in this prospectus.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="42%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="12%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="7%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=05 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=05 type=lead -->
    <TD width="12%" align="right">&nbsp;</TD>	<!-- colindex=05 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=05 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="16" align="center" valign="bottom">
    <DIV style="font-size: 1pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Period from May&#160;1,<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Period from May&#160;1,<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>2007 (Date of<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>2007 (Date of<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Inception) to<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Inception) to<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>December&#160;31,<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Year Ended December&#160;31,</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>December&#160;31,<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2007</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2009</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2009</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <B>Statements of Operations Data:</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Operating expenses:
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Research and development
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    196
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    2,635
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    3,004
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    5,835
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Selling, general and administrative
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    381
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    754
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    779
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,914
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Operating loss
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (577
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (3,389
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (3,783
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (7,749
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Interest income
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    65
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    52
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    17
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    134
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Interest expense
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (164
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (390
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (181
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (735
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Impairment of available for sale securities
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (85
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (85
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Change in fair value of investor stock purchase option
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    610
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    610
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Net loss
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (676
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (3,812
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (3,337
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (7,825
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Basic and diluted net loss per share
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (0.16
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (0.62
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (0.30
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Weighted average common shares
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    4,106,557
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    6,100,767
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    11,069,342
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    outstanding&#151;basic and diluted
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="17" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="11" align="right" valign="bottom">
    <FONT style="font-size: 8pt">(In thousands, except share and per
    share amounts)
    </FONT>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="80%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="3%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="8" nowrap align="center" valign="bottom">
    <DIV style="font-size: 1pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>As of December&#160;31, 2009</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Actual</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>As Adjusted(1)</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <B>Balance Sheet Data:</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Cash, cash equivalents and short term investments
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    3,417
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Working capital
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,226
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Total assets
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,740
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Long-term debt, net
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Total stockholders&#146; equity
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,512
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
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&nbsp;
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&nbsp;
</TD>
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</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="9" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
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&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
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&nbsp;
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&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    <FONT style="font-size: 8pt">(In thousands
    </FONT>
</TD>
<TD nowrap align="left" valign="bottom">
    <FONT style="font-size: 8pt">)
    </FONT>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

<TR>
    <TD width="2%"></TD>
    <TD width="1%"></TD>
    <TD width="97%"></TD>
</TR>

<TR>
    <TD align="right" valign="top">
    (1) </TD>
    <TD></TD>
    <TD valign="bottom">
    As adjusted to reflect the sale
    of&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;shares
    of our common stock in this offering at an assumed initial
    public offering price of $&#160;&#160;&#160;&#160;&#160; per
    share, the midpoint of the range on the front cover of this
    prospectus, after deducting the estimated underwriting discounts
    and commissions and estimated offering expenses payable by us. A
    $1.00 increase or decrease in the assumed initial public
    offering price of $&#160;&#160;&#160;&#160;&#160; per share
    would increase or decrease cash and cash equivalents, working
    capital, total assets and total stockholders&#146; equity by
    $&#160;&#160;&#160;&#160;&#160;&#160;million, assuming the
    number of shares offered by us, as set forth on the front cover
    of this prospectus, remains the same, and after deducting the
    estimated underwriting discounts and commissions and estimated
    offering expenses payable by us.</TD>
</TR>

</TABLE>
</DIV><!-- End box 1 -->
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<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">5</FONT></I>
</DIV><!-- END PAGE WIDTH -->
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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<A name='102'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Risk
    Factors</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 9pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>You should carefully consider the following information about
    risks, together with the other information contained in this
    prospectus, before making an investment in our common stock. If
    any of the circumstances or events described below actually
    arises or occurs, our business, results of operations, cash
    flows and financial condition could be harmed. In any such case,
    the market price of our common stock could decline, and you may
    lose all or part of your investment.</I>
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Risks Related to
    Our Business and Strategy</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">We have a
    limited operating history, expect future losses, and may be
    unable to achieve or maintain profitability.</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We were founded on May&#160;1, 2007 and to date we have engaged
    primarily in development of and initial clinical trials of our
    external saphenous vein support system, or eSVS MESH.
    Accordingly, we have limited operating history on which to base
    an evaluation of our business and prospects. As of
    December&#160;31, 2009, we had an accumulated deficit of
    $9.2&#160;million. We have incurred net losses in each year
    since our inception, and we expect to continue to incur
    operating losses for the foreseeable future. These losses, among
    other things, have had and will continue to have an adverse
    effect on our stockholders&#146; equity and working capital.
    Because of the numerous risks and uncertainties associated with
    developing medical devices, we are unable to predict the extent
    of any future losses or when we will become profitable, if at
    all. To date, we have not generated any product revenues and we
    have financed our operations and internal growth primarily
    through private placements of equity securities and convertible
    promissory notes. Our prospects must be considered in light of
    the significant risks, expenses, and difficulties frequently
    encountered by medical device companies in their early stage of
    development. We may not be successful in addressing the risks we
    will encounter, and our failure to do so would likely harm our
    business and our ability to continue to operate.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">If we are
    unable to successfully complete our clinical trials and
    commercialize our eSVS MESH in Europe, the United States, or
    other major markets or experience significant delays in doing
    so, our ability to generate revenue will be significantly
    delayed and our business will be harmed.</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our time and financial resources since our inception have
    largely been devoted to the development of our eSVS MESH. We
    have conducted only one human clinical trial of our eSVS MESH
    that was conducted outside the United States, and as of the date
    of this prospectus, our eSVS MESH has been implanted in only
    90&#160;patients. Our ability to generate revenues depends on
    the receipt of regulatory approvals and the successful
    development and commercialization of our eSVS MESH in select
    markets in Europe, in the United States, and in other major
    markets. If we are unable to prove the safety and effectiveness
    of our eSVS MESH through clinical trials, we will not receive
    marketing approvals from the FDA or foreign health regulatory
    authorities, and we will be unable to sell our eSVS MESH. We
    have no other products ready for clinical testing or
    commercialization; therefore, our ability to remain in business
    would be doubtful if our eSVS MESH is not proven to be safe and
    effective. Even if our eSVS MESH receives CE Mark approval in
    the European Union, if the data from our clinical trials is not
    satisfactory, we may not proceed with our planned filing of
    applications for regulatory approvals in the United States or
    other major markets, or we may be forced to delay the filings.
    Even if we file an application for approval with satisfactory
    clinical data, the FDA or foreign regulatory authorities may not
    accept our filing, or may request additional information,
    including data from additional clinical trials. Delays in
    collecting or analyzing our clinical trial data could result in
    delays in filing regulatory applications with the FDA or other
    regulatory authorities. The FDA or foreign regulatory
    authorities may also approve our eSVS MESH for very limited
    purposes with many restrictions on its use or in limited sizes,
    may delay approvals, or ultimately may not grant marketing
    approval for our eSVS MESH. Even if we do receive CE Mark, FDA,
    or other foreign regulatory approval, we may be unable to
    successfully commercialize our eSVS MESH in the European Union,
    the United States, or other major markets, and our ability to
    generate revenue will be significantly impaired.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Our
    success depends on the coronary bypass graft market and the
    superior outcomes of coronary bypass surgery over competitive
    procedures, and such superior outcomes may not
    continue.</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Physicians treat coronary artery disease with methods other than
    CABG procedures, including interventional
</DIV>
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<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">6</FONT></I>
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    techniques such as balloon angioplasty with or without the use
    of stents, pharmaceuticals, atherectomy catheters, and lasers.
    Several of these alternative treatments are widely accepted in
    the medical community and have a long history of use. In
    addition, technological advances may result in improvements in
    these alternative treatments or new therapies that produce
    superior treatment outcomes as compared to CABG surgery. The
    medical device industry is highly competitive and subject to
    rapid and profound technological change. Our success depends, in
    part, upon physicians continuing to perform a significant number
    of CABG procedures and our ability to achieve and maintain a
    competitive position in the development of technologies and
    products in the coronary artery bypass field. If physicians,
    patients, or hospitals opt to use our competitors&#146;
    products, our commercial opportunity will be reduced and our
    potential revenues will suffer.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">The
    market acceptance of new medical technologies is uncertain, and
    we may be unable to obtain market acceptance of our eSVS
    MESH.</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Even if our clinical trials demonstrate that the use of our eSVS
    MESH provides equivalent or more effective results as compared
    to coronary bypass operations using only the unsupported
    saphenous vein grafts and if all regulatory approvals are
    obtained, the success of our eSVS MESH will depend upon the
    acceptance by cardiovascular and cardiothoracic surgeons of our
    eSVS MESH as equivalent or better than the current saphenous
    vein procedure and other available treatments. We believe that
    physicians&#146; recommendations will be essential for the
    development and successful marketing of our eSVS MESH, and
    physicians will not begin to use our eSVS MESH unless they
    determine that it is a safe and effective alternative to current
    treatment methods. The degree of physician and market acceptance
    of our eSVS MESH will depend on a number of factors, including:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the perceived effectiveness of our eSVS MESH relative to its
    cost;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the prevalence and severity of any side effects;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    potential advantages over alternative treatments;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    effectiveness of our sales and marketing efforts;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    publication in peer-reviewed medical journals of data regarding
    the successful use and longer term clinical benefits of our eSVS
    MESH;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    development of new products and technologies by our competitors
    or new alternative treatments;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    regulatory developments related to manufacturing, marketing and
    selling our eSVS MESH both within and outside the United States;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    perceived liability risks arising out of the use of new products;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the willingness of physicians to adopt new technologies and the
    ability of physicians to acquire the skills necessary to use our
    eSVS MESH;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the strength of our sales and marketing support;&#160;and
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the adequacy of third-party coverage or reimbursement.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    If our eSVS MESH does not achieve an adequate level of
    acceptance by physicians, healthcare payors, and patients, we
    may not generate meaningful revenue and we may not become
    profitable. In addition, we have not yet determined pricing for
    our eSVS MESH and our pricing policies could adversely impact
    market acceptance of our eSVS MESH as compared to competing
    products and treatments. Any of the foregoing factors, or other
    factors, could limit or detract from market acceptance of our
    eSVS MESH. If our eSVS MESH is not accepted by the market, our
    business would be harmed.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">We will
    be subject to intense competition and the risk of obsolescence
    if our competitors develop products superior to our eSVS
    MESH.</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We face competition from established medical technology,
    pharmaceutical and biotechnology companies, as well as from
    academic institutions, government agencies, and private and
    public research institutions in the United States and abroad.
    The industry in which we operate has undergone, and is expected
    to continue to undergo, rapid and significant technological
    change, and we expect competition to intensify as technical
    advances are made. Our competitors may develop and commercialize
    medical device or pharmaceutical products that are safer or more
</DIV>
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<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">7</FONT></I>
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    effective, have fewer side effects or are less expensive than
    coronary artery bypass surgery. For example, we are aware of
    companies that are developing various other less-invasive
    technologies for treating cardiovascular disease, which could
    make our technology obsolete. We also compete in recruiting and
    retaining qualified scientific and management personnel,
    establishing clinical trial sites and patient registration for
    clinical trials, as well as in acquiring technologies and
    technology licenses complementary to our programs or
    advantageous to our business.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Furthermore, companies with significantly greater financial
    resources and expertise in research and development,
    manufacturing, pre-clinical testing, conducting clinical trials,
    obtaining regulatory approvals and marketing approved products
    than we have may be working on products similar to our eSVS
    MESH. Our eSVS MESH may not replace current surgical techniques
    and other products or techniques may render our eSVS MESH
    obsolete. In addition, our distributors will also face
    competition from established companies with significantly
    greater financial and marketing resources. Our competitors may
    produce more advanced products than ours or demonstrate superior
    safety of their products. Our ability to effectively compete
    depends on our ability to innovate successfully. There are few
    barriers that would prevent new or existing competitors from
    developing products that compete directly with ours. Demand for
    our eSVS MESH could be diminished by equivalent or superior
    products and technologies offered by competitors.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Smaller or early-stage companies may also prove to be
    significant competitors, particularly through collaborative
    arrangements with, or mergers with or acquisitions by, large and
    established companies or through the development of novel
    products and technologies.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our competitive position also depends on:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    obtaining any necessary United States or foreign marketing
    approvals;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    widespread awareness, acceptance and adoption by the
    cardiovascular and cardiothoracic markets of our eSVS MESH;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    product coverage and reimbursement from third-party payors,
    insurance companies and others;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    published studies supporting the effectiveness and safety and
    long-term clinical benefit of our eSVS MESH;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    properly identifying customer needs and delivering new products
    or product enhancements to address those needs;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    limiting the time required from proof of feasibility to routine
    production;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    limiting the timing and cost of regulatory approvals;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    our ability to attract and retain qualified personnel;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the extent of our patent protection or our ability to otherwise
    develop proprietary products and processes;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    our ability to maintain adequate manufacturing capacity and to
    source the materials and equipment required to manufacture our
    eSVS MESH; and
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    securing sufficient capital resources to expand our research and
    development, sales and marketing efforts, and manufacturing
    capacity.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    If our eSVS MESH is not competitive based on these or other
    factors, our business would be harmed.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">We have
    limited manufacturing resources and experience, and if our
    manufacturing facilities are unable to provide an adequate
    supply of our eSVS MESH, our growth could be limited and our
    business could be harmed.</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have limited experience in manufacturing our eSVS MESH and
    rely on outside vendors for several materials and processes. We
    currently manufacture our eSVS MESH for our clinical trials and
    for research and development purposes at our manufacturing
    facility in Minnesota. If our existing manufacturing facility
    experiences a disruption, we would have no other means of
    manufacturing our eSVS MESH until we are able to restore the
    manufacturing capability at our current facility or develop
    alternative manufacturing facilities.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    If we are unable to produce sufficient quantities of our eSVS
    MESH for use in our current and planned clinical
</DIV>
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<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">8</FONT></I>
</DIV><!-- END PAGE WIDTH -->
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    trials or for commercialization, or if our manufacturing process
    yields a substandard product, our regulatory, development and
    commercialization efforts would be delayed.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In order to produce our eSVS MESH in the quantities that would
    be required for commercialization, we would have to increase, or
    &#147;scale up,&#148; the production process over the current
    level of production. Manufacturers often encounter difficulties
    in scaling up production, including problems involving yields,
    controlling and anticipating costs, quality control and
    assurance, supply and shortages of qualified personnel. If the
    <FONT style="white-space: nowrap">scaled-up</FONT>
    production process is not efficient or produces a product that
    does not meet quality and other standards, we may be unable to
    meet market demand and our revenues, business and financial
    prospects would be adversely affected. The contract vendors with
    which we are and will be developing relationships may not have
    the ability to produce the quantities of the materials needed
    for human clinical trials or commercial sales or may not do so
    at prices that allow our eSVS MESH to compete successfully in
    the market.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Additionally, any damage to or destruction of our facilities or
    our equipment, prolonged power outage or contamination at our
    facilities would significantly impair our ability to produce our
    eSVS MESH.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">We depend
    upon third-party suppliers, making us vulnerable to supply
    problems and price fluctuations.</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We rely on third-party suppliers to provide us certain
    components of our eSVS MESH. We depend on these suppliers to
    provide us with materials in a timely manner that meet our
    quality, quantity and cost requirements. These suppliers may
    encounter problems during manufacturing for a variety of
    reasons, including unanticipated demand from larger customers,
    failure to follow specific protocols and procedures, failure to
    comply with applicable regulations, equipment malfunction,
    quality or yield problems, and environmental factors, any of
    which could delay or impede their ability to meet our demand.
    Our reliance on these outside suppliers also subjects us to
    other risks that could harm our business, including:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    interruption of supply resulting from modifications to, or
    discontinuation of, a supplier&#146;s operations;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    delays in product shipments resulting from defects, reliability
    issues or changes in components from suppliers;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    price fluctuations due to a lack of long-term supply
    arrangements for key components with our suppliers;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    errors in manufacturing components, which could negatively
    impact the effectiveness or safety of our eSVS MESH or cause
    delays in shipment of our eSVS MESH;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    discontinued production of components, which could significantly
    delay our production and sales and impair operating margins;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    inability to obtain adequate supplies in a timely manner or on
    commercially acceptable terms;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    difficulty locating and qualifying alternative suppliers for our
    sole-source supplies;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    delays in production and sales caused by switching components,
    which may require product redesign and new regulatory
    submissions;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    delays due to evaluation and testing of products from
    alternative suppliers and corresponding regulatory
    qualifications;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    non-timely delivery of components due to our suppliers
    manufacturing products for a range of customers; and
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    inability of suppliers to fulfill orders and meet requirements
    because of supplier financial hardships.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Other than existing, unfulfilled purchase orders, our suppliers
    have no contractual obligations to supply us with, and we are
    not contractually obligated to purchase from them, any of our
    supplies. Any supply interruption from our suppliers or failure
    to obtain additional suppliers for any of the components used in
    our eSVS MESH would limit our ability to manufacture our eSVS
    MESH and could have a material adverse effect on our business,
    financial condition and results of operations. We have no reason
    to believe that any of our current suppliers could not be
    replaced if they were unable to deliver components to us in a
    timely manner or at an acceptable price and level of quality.
    However, if we lost one of these suppliers and were unable to
    obtain an alternate source on a timely basis or on terms
    acceptable to us, our production schedules could be delayed, our
    margins could be
</DIV>
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<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">9</FONT></I>
</DIV><!-- END PAGE WIDTH -->
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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    negatively impacted, and we could fail to meet our
    customers&#146; demand. Our customers will rely upon our ability
    to meet committed delivery dates and any disruption in the
    supply of key components would adversely affect our ability to
    meet these dates and could result in legal action by our
    customers, cause us to lose customers or harm our ability to
    attract new customers, any of which could decrease our revenue
    and negatively impact our growth. In addition, to the extent
    that our suppliers use technology or manufacturing processes
    that are proprietary, we may be unable to obtain comparable
    materials or components from alternative sources.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Manufacturing operations are often faced with a supplier&#146;s
    decision to discontinue manufacturing a component, which may
    force us to make last time purchases, qualify a substitute part,
    or make a design change which may divert engineering time away
    from the development of new products.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Quality
    issues in our manufacturing processes could delay our clinical
    trials and our commercialization.</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Even if we are able to contract with manufacturers for key
    materials or supplies, we may experience future manufacturing
    difficulties. Any difficulties in locating and hiring material
    manufacturers or in the ability of manufacturers to supply
    materials at the times and in the quantities we need, and at
    prices that allow us to compete, could have a material adverse
    effect on our business.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The production of our eSVS MESH must occur in a highly
    controlled, clean environment to minimize particles and other
    yield- and quality-limiting contaminants. In spite of stringent
    quality controls, weaknesses in process control or minute
    impurities in materials may cause a substantial percentage of
    defective products in a lot. In addition, we must meet certain
    lot release specifications before our eSVS MESH can be shipped
    to our clinical trial sites. If a particular lot fails to meet
    lot release specifications, we will not be able to ship that lot
    to our clinical trial sites. If we are not able to maintain
    stringent quality controls, if contamination problems arise or
    if we are not able to meet our lot release specifications, our
    clinical trials could be delayed, which would harm our business
    and our results of operations.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Our
    business is subject to risks relating to operating
    internationally.</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    As part of our product development and regulatory strategy, we
    intend to market our eSVS MESH internationally following CE Mark
    approval. There are a number of risks associated with conducting
    business internationally, including:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    potential differences in treatment protocols and methods across
    the markets in which we expect to market our eSVS MESH;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    potential differences in reimbursement levels and the
    requirements necessary to obtain such reimbursement;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    general economic and political conditions in the markets in
    which we operate;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    potential international conflicts, including terrorist acts;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    potential increased costs associated with overlapping tax
    structures;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    potential trade restrictions, exchange controls and legal
    restrictions on the repatriation of funds into the United States;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    difficulties and costs associated with staffing and managing
    foreign operations, including risks of violations of local laws
    or the U.S.&#160;Foreign Corrupt Practices Act by employees
    overseas or the OECD Convention on Combating Bribery of Foreign
    Public Officials in International Business Transactions;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    unexpected changes in regulatory requirements;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the difficulties of compliance with a wide variety of foreign
    laws and regulations;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    unfavorable regulations in foreign jurisdictions regarding
    distributors;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the deferral of revenue recognition;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    longer accounts receivable cycles in certain foreign countries;
    and
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    import and export licensing requirements.
</TD>
</TR>

</TABLE>
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<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">10</FONT></I>
</DIV><!-- END PAGE WIDTH -->
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Any of these risks could adversely affect our international
    operations or financial results, which would harm our business.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">We could
    become subject to product liability claims, product recalls,
    other field actions and warranty claims that could be expensive,
    divert management&#146;s attention, and harm our
    business.</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We face an inherent risk of exposure to product liability claims
    in the event that the use of our eSVS MESH results or is alleged
    to have resulted in adverse effects to a patient. In many
    jurisdictions, producers of medical products are strictly liable
    for personal injuries caused by medical devices. A product
    liability claim against us, even if we are ultimately successful
    in defending it, could have a material adverse effect on our
    business, results of operations and reputation.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We may be held liable if our eSVS MESH causes injury or death or
    is found otherwise unsuitable during usage. Because our eSVS
    MESH is designed to be used in complex surgical procedures,
    defects could result in a number of complications, including
    serious injury or death. It is also possible that defects in the
    design, manufacture or labeling of our eSVS MESH might
    necessitate a product recall or other field corrective action,
    which may result in warranty claims beyond our expectations and
    may harm our reputation. A product liability claim, regardless
    of its merit or eventual outcome, could result in significant
    legal defense costs. The coverage limits of our insurance
    policies may not be adequate to cover future claims. We may be
    unable to maintain product liability insurance in the future at
    satisfactory rates or with adequate amounts. A product liability
    claim, any product recalls or other field actions or excessive
    warranty claims, whether arising from defects in design or
    manufacture or otherwise, could divert management&#146;s
    attention from our core business, be expensive to defend and
    result in sizable damage awards against us, any of which could
    harm our reputation and business.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">If
    third-party payors do not provide sufficient coverage or
    reimbursement to healthcare providers for the use of our eSVS
    MESH, our acceptance in the marketplace would be
    harmed.</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The availability of insurance coverage and reimbursement for
    newly approved medical devices and procedures is uncertain. Our
    success depends upon the use of our eSVS MESH and whether
    third-party insurance coverage and reimbursement for the use of
    this product is available.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our success in international markets depends upon the
    eligibility of reimbursement for our eSVS MESH through
    government-sponsored healthcare payment systems and third-party
    payors. Reimbursement and healthcare payment systems in
    international markets vary significantly by country and, within
    some countries, by region. In many international markets,
    payment systems may control reimbursement for procedures
    performed using new products as well as procurement of these
    products. In addition, as economies of emerging markets develop,
    these countries may implement changes in their healthcare
    delivery and payment systems. Furthermore, healthcare cost
    containment efforts similar to those underway in the United
    States are prevalent in many of the other countries in which we
    intend to sell our eSVS MESH and these efforts are expected to
    continue. Market acceptance of our eSVS MESH in a particular
    country may depend on the availability and level of
    reimbursement in that country. In the event that our customers
    are unable to obtain adequate reimbursement for our eSVS MESH in
    international markets in which we are seeking to sell our eSVS
    MESH, market acceptance of our eSVS MESH would be adversely
    affected.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In the United States, our eSVS MESH would be purchased primarily
    by medical institutions, which would then bill various
    third-party payors, such as the Centers for Medicare&#160;&#038;
    Medicaid Services, or CMS, which administer the Medicare
    program, and other government programs and private insurance
    plans, for the healthcare services provided to their patients.
    The process involved in applying for coverage and incremental
    reimbursement from CMS is lengthy and expensive. Even if our
    eSVS MESH receives FDA and other regulatory approval, it may not
    be granted coverage and reimbursement in the foreseeable future,
    if at all. Moreover, many private payors look to CMS in setting
    their reimbursement policies and amounts. If CMS or other
    agencies limit coverage or decrease or limit reimbursement
    payments for doctors and hospitals, this may affect coverage and
    reimbursement determinations by many private payors.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    CMS may not provide coverage and reimbursement for our eSVS
    MESH. If a medical device does not receive incremental
    reimbursement from CMS, then a medical institution would have to
    absorb the cost of our eSVS
</DIV>
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    MESH as part of the cost of the procedure in which the products
    are used. Acute care hospitals are now generally reimbursed by
    CMS for inpatient operating costs under a Medicare hospital
    inpatient prospective payment system. Under the Medicare
    hospital inpatient prospective payment system, acute care
    hospitals receive a fixed payment amount for each covered
    hospitalized patient based upon the Diagnosis-Related Group, or
    DRG, to which the inpatient stay is assigned, regardless of the
    actual cost of the services provided. At this time, we do not
    know the extent to which medical institutions would consider
    insurers&#146; payment levels adequate to cover the cost of our
    eSVS MESH. Failure by hospitals and physicians to receive an
    amount that they consider to be adequate reimbursement for
    procedures in which our eSVS MESH is used could deter them from
    purchasing our eSVS MESH and limit our revenue growth. In
    addition, pre-determined DRG payments may decline over time,
    which could deter medical institutions from purchasing our eSVS
    MESH. If medical institutions are unable to justify the costs of
    our eSVS MESH, they may refuse to purchase it, which would
    significantly harm our business.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">We may
    not be able to attract and retain the technical, regulatory, and
    sales personnel necessary for our success, which may divert
    management&#146;s attention and negatively impact our
    operations.</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We are highly dependent on our senior management, specifically
    Manny Villafa&#241;a, our Chairman and Chief Executive Officer,
    and Michael Winegar, our Chief Operating Officer and Vice
    President of Regulatory Affairs. The loss of services of either
    of these individuals would impair our ability to commercialize
    our eSVS MESH and develop new products and would harm our
    business. Our success will depend on our ability to retain our
    senior management and to attract and retain qualified personnel
    in the future. Competition for senior management personnel, as
    well as clinical and regulatory specialists, engineers and sales
    personnel, is intense and we may not be able to retain our
    personnel. The loss of a member of our senior management or our
    professional staff would require the remaining senior executive
    officers to divert immediate and substantial attention to
    seeking a replacement. Each of our senior officers may terminate
    his employment at any time without notice and without cause or
    good reason. We do not carry key person life insurance on any of
    our employees. If we lose the services of any key personnel, our
    business, financial condition and results of operations may
    suffer.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">We will
    need to increase the size of our organization and we may
    experience difficulties managing growth. If we are unable to
    manage the anticipated growth of our business, our future
    revenue and operating results may be adversely
    affected.</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We expect to significantly expand our manufacturing operations,
    sales support and marketing staff, and administrative and
    financial resources to meet anticipated growth in demand for our
    eSVS MESH. We may face difficulties in recruiting, training,
    managing and retaining an adequate number of qualified personnel
    to support this growth. Rapid expansion in personnel may mean
    that less experienced people could be manufacturing and
    providing clinical and sales and marketing support for our eSVS
    MESH, and managing our administrative and financial functions,
    which could result in unanticipated costs and disruptions to our
    operations. If we cannot scale and manage our business
    appropriately, our anticipated growth may be impaired and our
    financial results will suffer.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Becoming
    a public company will cause us to incur increased costs and
    demands on our management and divert management&#146;s attention
    from our core business.</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The obligations of being a public company, including substantial
    public reporting and auditing obligations, will require
    significant additional expenditures, place additional demands on
    our management and divert management&#146;s time and attention
    away from our core business. These additional obligations will
    require us to hire additional personnel in order to ensure
    compliance with the regulatory requirements of the Securities
    and Exchange Commission and the NASDAQ Global Market. We will be
    required to report on our internal controls, as required by
    Section&#160;404 of the Sarbanes-Oxley Act, beginning with our
    annual report for the year ending December&#160;31, 2011. We
    cannot be certain as to the timing of completion of our
    evaluation, testing and remediation actions relating to our
    internal controls or the impact of the same on our operations.
    Our management may not be able to effectively and timely
    implement controls and procedures that adequately respond to the
    increased regulatory compliance and reporting requirements that
    will be applicable to us as a public company. If we fail to
    staff our accounting and finance function adequately or maintain
    internal controls adequate to meet the demands that will be
    placed upon us as a public company, including the requirements
    of the Sarbanes-Oxley Act, we may be unable
</DIV>
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    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">12</FONT></I>
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    to report our financial results accurately or in a timely manner
    and our business and stock price may suffer. The costs of being
    a public company, as well as diversion of management&#146;s time
    and attention, may harm our business, financial condition and
    results of operations.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Risks Related to
    Our Intellectual Property</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">If we are
    unable to protect our intellectual property rights, our ability
    to compete will be harmed.</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We rely upon patents, trade secret laws and confidentiality
    agreements to protect our technology. We have six patent
    applications pending in the United States and nine patent
    applications pending in countries outside the United States on
    our eSVS MESH. We also have one international patent application
    pending, which gives us the opportunity to file in more
    individual countries. Some of our pending patent applications
    have been examined and currently stand rejected. We will
    continue to pursue obtaining patents from these applications,
    but it is possible that our pending patent applications may not
    issue as patents or, if issued, may not issue in a form that
    will be advantageous to us. We expect to launch our eSVS MESH in
    Europe before any of our pending European patent applications
    issue as patents. Any patents we obtain in the future might be
    invalidated or circumvented by third parties. If any challenges
    are successful, competitors might be able to market products and
    use manufacturing processes that are substantially similar to
    ours. We may not be able to prevent the unauthorized disclosure
    or use of our technical knowledge or other trade secrets by
    consultants, vendors or former or current employees, despite the
    existence generally of confidentiality agreements and other
    contractual restrictions. Monitoring unauthorized use and
    disclosure of our intellectual property is difficult, and we do
    not know whether the steps we have taken to protect our
    intellectual property will be adequate. In addition, the laws of
    many foreign countries may not protect our intellectual property
    rights to the same extent as the laws of the United States. To
    the extent that our intellectual property protection is
    inadequate, we are exposed to a greater risk of direct
    competition. In addition, competitors could purchase our eSVS
    MESH and attempt to replicate some or all of the competitive
    advantages we derive from our development efforts or attempt to
    design around our protected technology. If our intellectual
    property is not adequately protected against competitors&#146;
    products and methods, our competitive position could be
    adversely affected, as could our business.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The laws of some foreign countries may not protect our
    intellectual property rights to the same extent as do the laws
    of the United States. In the event a competitor infringes upon
    our patent or other intellectual property rights, enforcing
    those rights may be difficult and time consuming. Even if
    successful, litigation to enforce our intellectual property
    rights or to defend our patents against challenge could be
    expensive and time consuming and could divert our
    management&#146;s attention. We may not have sufficient
    resources to enforce our intellectual property rights or to
    defend our patents against a challenge.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We also rely upon trade secrets, technical know-how and
    continuing technological innovation to develop and maintain our
    competitive position. We require our employees to execute
    appropriate confidentiality and
    <FONT style="white-space: nowrap">assignment-of-inventions</FONT>
    agreements with us. These agreements typically provide that all
    materials and confidential information developed or made known
    to the individual during the course of the individual&#146;s
    relationship with us be kept confidential and not disclosed to
    third parties except in specific circumstances and that all
    inventions arising out of the individual&#146;s relationship
    with us shall be our exclusive property. Additionally, we seek
    to have our consultants and advisors execute similar
    confidentiality and
    <FONT style="white-space: nowrap">assignment-of-inventions</FONT>
    agreements with us, but in some instances these agreements have
    not included
    <FONT style="white-space: nowrap">assignment-of-invention</FONT>
    provisions. These agreements may be breached, and in some
    instances, we may not have an appropriate remedy available for
    breach of the agreements. Furthermore, our competitors may
    independently develop substantially equivalent proprietary
    information and techniques, reverse engineer our information and
    techniques, or otherwise gain access to our proprietary
    technology.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Claims of
    infringement or misappropriation of the intellectual property
    rights of others could prohibit us from commercializing our eSVS
    MESH and harm our business.</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The medical device industry has been characterized by extensive
    litigation regarding patents and other intellectual property
    rights, and companies in the industry have used intellectual
    property litigation to gain a competitive advantage. We may
    become a party to patent infringement claims and litigation or
    interference proceedings
</DIV>
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    declared by the U.S.&#160;Patent and Trademark Office to
    determine the priority of inventions. The defense and
    prosecution of these matters are both costly and time consuming.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Additionally, we may need to commence proceedings against others
    to enforce our patents, to protect our trade secrets or know-how
    or to determine the enforceability, scope and validity of the
    proprietary rights of others. These proceedings would result in
    substantial expense to us and significant diversion of effort by
    our technical and management personnel.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We are aware of patents issued to third parties that contain
    subject matter related to our technology. These or other third
    parties may assert that our eSVS MESH infringes the claims in
    their patents or seek to expand their patent claims to cover
    aspects of our eSVS MESH. An adverse determination in litigation
    or interference proceedings to which we may become a party could
    subject us to significant liabilities or require us to seek
    licenses. In addition, if we are found to willfully infringe
    third-party patents, we could be required to pay treble damages
    in addition to other penalties. Although patent and intellectual
    property disputes in the medical device area have often been
    settled through licensing or similar arrangements, costs
    associated with these arrangements may be substantial and could
    include ongoing royalties. We may be unable to obtain necessary
    licenses on satisfactory terms, if at all. If we do not obtain
    necessary licenses, we may be required to redesign our eSVS MESH
    to avoid infringement, and it may not be possible to do so
    effectively. Adverse determinations in a judicial or
    administrative proceeding or failure to obtain necessary
    licenses could cause us to incur significant costs, place
    significant strain on our resources, divert management&#146;s
    attention from our business and harm our reputation and prevent
    us from commercializing our eSVS MESH or any other product we
    may develop, which would have a significant adverse impact on
    our business. Some of our competitors may be able to sustain the
    costs of complex patent litigation more effectively than we can
    because they have substantially greater resources.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Risks Related to
    Regulatory Approval and Other Government Regulations</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">We will
    be subject to government regulation, and we may not receive
    approval for our eSVS MESH on a timely basis, if at
    all.</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our eSVS MESH, product development activities and manufacturing
    processes are, and will continue to be, subject to extensive and
    rigorous scrutiny and 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 or
    approval for new medical products from the FDA is costly and
    time consuming, and there can be no assurance that such approval
    will be granted for our eSVS MESH on a timely basis, if at all,
    or that the FDA review will not involve delays that would
    adversely affect our ability to commercialize our eSVS MESH.
    Even if regulatory clearance or approval to market a product is
    obtained from the FDA, this clearance or approval may entail
    limitations on the indicated uses of the product. Marketing
    clearance or approval can also be withdrawn by the FDA due to
    failure to comply with regulatory standards or the occurrence of
    unforeseen problems following initial clearance.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The FDA will require us to file a Pre-Market Approval, or PMA,
    application with regard to our eSVS MESH, and there is no
    assurance whatsoever that approval will be obtained. Even if
    approval is obtained, the process of obtaining a PMA is
    expensive, uncertain and lengthy, frequently requiring several
    years from the date of submission. Changing FDA policies and
    requirements for PMA products may add additional uncertainty.
    Significant delay or failure to obtain FDA approval to market
    our eSVS MESH would harm our business.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">The FDA
    may not approve our investigational device exemption application
    for our eSVS MESH, which would prevent us from conducting our
    clinical trials in the United States, and even if the FDA does
    grant such approval, our clinical trials may be more costly and
    burdensome than we currently anticipate, which would limit or
    delay our ability to complete clinical trials and ultimately
    market our eSVS MESH in the United States.</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The FDA is reviewing our application for an investigational
    device exemption, or IDE, which, if granted, will allow us to
    begin clinical trials of our eSVS MESH in the United States. The
    FDA has not yet approved our application for an IDE and may
    never grant such approval.
</DIV>
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    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">14</FONT></I>
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    If the FDA approves our IDE application, the clinical trials we
    conduct may have unanticipated complications and delays and may
    be more costly than we currently anticipate. The FDA may approve
    our IDE application with conditions relating to the scope or
    design of our clinical trials for which we have not planned.
    These conditions may require us to collect additional data,
    enroll more patients, spend more time and expend more resources
    than we currently anticipate, and these conditions may make a
    clinical trial in the United States more costly and time
    consuming than we currently plan. Any unanticipated costs and
    length of U.S.&#160;clinical trials would delay our ability to
    market our eSVS MESH in the United States, which would harm our
    business.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    If the FDA does not approve our IDE application, we would be
    unable to conduct clinical trials of our eSVS MESH in the United
    States. If our IDE application is not approved and we are unable
    to conduct U.S.&#160;clinical trials, we would not be able to
    submit a PMA application and we would be unable to market our
    eSVS MESH in the United States, which would have an adverse
    effect on our business.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Even if
    our eSVS MESH is approved by regulatory authorities, if we fail
    to comply with ongoing regulatory requirements, or if we
    experience unanticipated problems with our eSVS MESH, it could
    be subject to restrictions or withdrawal from the
    market.</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Any product for which we obtain marketing approval, along with
    the manufacturing processes, post-approval clinical data and
    promotional activities for such product, will be subject to
    continual review and periodic inspections by the FDA and other
    regulatory bodies. Even if regulatory approval of our eSVS MESH
    is granted, the approval may be subject to limitations on the
    indicated uses for which the product may be marketed or contain
    requirements for costly post-marketing testing and surveillance
    to monitor the safety or effectiveness of the product. Later
    discovery of previously unknown problems with our eSVS MESH,
    including unanticipated adverse events or adverse events of
    unanticipated severity or frequency, manufacturer or
    manufacturing processes, or failure to comply with regulatory
    requirements, may result in restrictions on such products or
    manufacturing processes, withdrawal of the products from the
    market, voluntary or mandatory recall, fines, suspension of
    regulatory approvals, product seizures, injunctions or the
    imposition of civil or criminal penalties.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">We will
    be highly dependent on third-party institutions to conduct our
    clinical testing, and the results of such testing may delay or
    prevent regulatory approval of our eSVS MESH.</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We rely on clinical investigators and clinical trial sites to
    enroll patients in our clinical trials and other third parties
    to manage our trials and to perform related data collection and
    analysis. However, we are not able to control the amount and
    timing of resources that clinical trial sites devote to our
    clinical trials. If these clinical investigators and clinical
    trial sites fail to enroll a sufficient number of patients in
    our clinical trials or fail to ensure compliance by patients
    with clinical protocols, we will be unable to complete our
    planned trials, which could prevent us from obtaining regulatory
    approvals for our eSVS MESH. Our agreements with clinical
    investigators and clinical trial sites for clinical testing
    place substantial responsibilities on these parties and, if
    these parties fail to perform as expected, our planned trials
    could be delayed or terminated. If these clinical investigators,
    clinical trial sites, or other third parties do not carry out
    their contractual duties or obligations or fail to meet expected
    deadlines, or if the quality or accuracy of the clinical data
    they obtain is compromised due to their failure to adhere to our
    clinical protocols, the FDA&#146;s good clinical practice
    regulations or for other reasons, our clinical trials may be
    extended, delayed or terminated, and we may be unable to obtain
    regulatory approval for, or successfully commercialize, our eSVS
    MESH.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In addition, the data obtained from human clinical testing is
    subject to varying interpretations that could delay, limit or
    prevent regulatory approval, and delays or rejection may be
    encountered based upon changes in FDA policy for device approval
    during the period of development.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Our
    facilities will be subject to inspection by the FDA and
    international authorities, and we could face penalties if we are
    found to be non-compliant with the regulations of the FDA or
    international authorities.</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    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
</DIV>
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    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">15</FONT></I>
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    determination that we are in material violation of such
    regulations could lead to the imposition of civil penalties,
    including fines, product recalls, product seizures 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 eSVS MESH.
    The FDA could also limit or prevent the manufacture or
    distribution of our eSVS MESH 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.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Our
    promotional and marketing activities will be subject to
    regulation by the FDA and international authorities, and we
    could face severe penalties if we are found to be promoting our
    eSVS MESH for an unapproved use.</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    If the FDA or international authorities determine that our
    promotional materials or activities constitute promotion of our
    eSVS MESH for an unapproved use, it could demand that we cease
    the use of or modify our promotional materials or subject us to
    regulatory enforcement actions, including the issuance of a
    warning letter, injunction, civil fine and criminal penalties.
    It is also possible that other federal, state or foreign
    enforcement authorities might take action if they consider
    promotional or other materials to constitute promotion of our
    eSVS MESH for an unapproved use, which could result in
    significant fines or penalties under other statutory
    authorities, such as laws prohibiting false claims for
    reimbursement.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Our
    success will also be dependent on complying with foreign
    regulatory requirements, and our inability to do so could result
    in sales of our eSVS MESH being restricted
    internationally.</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our revenues will initially be dependent upon sales of our eSVS
    MESH outside the United States. Foreign regulatory bodies have
    established varying regulations governing product standards,
    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 inability or failure of such foreign
    distributors to comply with varying foreign regulation or the
    imposition of new regulations could restrict the sale of our
    eSVS MESH internationally and thereby harm our business.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Proposed
    legislation may negatively affect coverage and reimbursement
    levels for our eSVS MESH.</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Even if third-party payors provide adequate coverage and
    reimbursement for our eSVS MESH, adverse changes in third-party
    payors&#146; general policies toward reimbursement could
    preclude market acceptance for our eSVS MESH and harm our
    potential sales and revenue growth, which in turn would harm our
    business. Recently, healthcare reform legislation was signed
    into law in the United States and we expect that there will
    continue to be legislative proposals for governmental controls
    over healthcare in the United States and other countries. Some
    third-party payors also require pre-approval of coverage or
    companies to demonstrate the superiority of their product before
    they will reimburse healthcare providers who use such devices or
    procedures.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The trend toward managed healthcare in the United States and
    other countries and legislation intended to reduce the cost of
    government insurance programs could significantly influence the
    purchase of healthcare services and products, and may result in
    necessary price reductions for our eSVS MESH or the exclusion of
    our eSVS MESH from reimbursement programs. It is uncertain
    whether our eSVS MESH will be viewed as sufficiently
    cost-effective to warrant adequate coverage and reimbursement
    levels.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Our
    operations involve hazardous materials, and we must comply with
    environmental laws and regulations, which can be expensive, time
    consuming, and may impair our operations.</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We are subject to a variety of federal, state and local
    regulations relating to the use, handling, storage, disposal and
    human exposure to hazardous and toxic materials. We could incur
    costs, fines and civil and criminal sanctions, third-party
    property damage or personal injury claims, or could be required
    to incur substantial investigation or remediation costs, if we
    were to violate or become liable under environmental laws. We do
    not have insurance for environmental liabilities and liability
    under environmental laws can be joint and several and without
    regard to comparative fault. Environmental laws could become
    more stringent over time, imposing greater compliance costs
</DIV>
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    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">16</FONT></I>
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    and increasing risks and penalties associated with violations,
    which could harm our business. Compliance with current or future
    environmental and safety laws and regulations could restrict our
    ability to expand our facilities, impair our research,
    development or production efforts, or require us to incur other
    significant expenses. There can be no assurance that violations
    of environmental laws or regulations will not occur in the
    future as a result of the inability to obtain permits, human
    error, accident, equipment failure or other causes.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Risks Related to
    Our Common Stock and this Offering</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Because
    there has not been a public market for our common stock and our
    stock price may be volatile, you may not be able to resell your
    shares at or above the initial public offering price.</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Prior to this initial public offering there has not been a
    public market for our common stock. We cannot predict the extent
    to which investors&#146; interests will lead to an active
    trading market for our common stock or whether the market price
    of our common stock will be volatile following this offering. If
    an active trading market does not develop or is not sustained,
    you may have difficulty selling any of our common stock that you
    buy. The initial public offering price for our common stock will
    be determined by negotiations between representatives of the
    underwriters and us and may not be indicative of prices that
    will prevail in the open market following this offering.
    Consequently, you may not be able to sell our common stock at
    prices equal to or greater than the price you paid in this
    offering. In addition to the risk factors discussed elsewhere in
    this section, the following factors, most of which are outside
    of our control, could cause the market price of our common stock
    to decrease significantly from the price you pay in this
    offering:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    inconclusive or failed clinical trial outcomes of our eSVS MESH;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    failure to achieve market acceptance for our eSVS MESH;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    inability to manufacture our eSVS MESH in adequate quantities or
    to commercial standards;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    departure of key personnel;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    inability to hire, train and retain qualified personnel to
    support our growth;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    variations in our quarterly operating results or those of
    companies that are perceived to be similar to us;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    announcements by our competitors of significant technological
    developments;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    changes in governmental regulations and standards;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    litigation related to patent infringement and product liability
    claims;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    changes to financial estimates by equity research analysts;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    sales of common stock or other securities by us in the future;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    decreases in market valuations of similar companies; and
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    fluctuations in stock market prices and volumes.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Each of these factors could cause the market price of our stock
    to decline, and you may lose some or all of your investment.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In addition, the stock markets have been extremely volatile.
    Securities class action litigation is often initiated against a
    company following a period of volatility in the market price of
    the company&#146;s securities. If class action litigation is
    initiated against us, we would incur substantial costs and our
    management&#146;s attention would be diverted from our
    operations.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">If equity
    research analysts do not publish research or reports about our
    business or if they issue unfavorable research or downgrade our
    common stock, the price of our common stock could
    decline.</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The trading market for our common stock will rely in part on the
    research and reports that equity research analysts publish about
    us and our business. We do not control these analysts. Equity
    research analysts may elect not to provide research coverage of
    our common stock, which may adversely affect the market price of
    our common stock. If equity research analysts do provide
    research coverage of our common stock, the price of our common
    stock could decline if one or more of these analysts downgrade
    our common stock or if they issue other
</DIV>
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    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">17</FONT></I>
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    unfavorable commentary about us or our business. If one or more
    of these analysts ceases coverage of our company, we could lose
    visibility in the market, which in turn could cause our stock
    price to decline.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Future
    sales of our common stock by our existing stockholders could
    cause our stock price to decline and cause you to lose part or
    all of your investment.</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    If our stockholders sell substantial amounts of our common stock
    in the public market, the market price of our common stock could
    decrease significantly. The perception in the public market that
    our stockholders might sell shares of our common stock could
    also depress the market price of our common stock. Substantially
    all of our existing stockholders prior to this offering are
    subject to
    <FONT style="white-space: nowrap">lock-up</FONT>
    agreements that restrict their ability to transfer their shares
    of our common stock for at least 180&#160;days after the date of
    this prospectus, subject to certain exceptions. Upon expiration
    of the
    <FONT style="white-space: nowrap">lock-up</FONT>
    period, shares of our common stock will be eligible for sale in
    the public market. In addition, we intend to file registration
    statements with the SEC covering (a)&#160;any shares of our
    common stock acquired upon option exercises prior to the closing
    of this offering, (b)&#160;all of the shares subject to options
    outstanding, but not exercised, as of the closing of this
    offering and (c)&#160;all of the shares available for future
    issuance under our stock incentive plan upon the closing of this
    offering. The market price of shares of our common stock may
    decrease significantly when the restrictions on resale by our
    existing stockholders lapse and our stockholders, warrant
    holders and option holders are able to sell shares of our common
    stock into the market. A decline in the price of shares of our
    common stock might impede our ability to raise capital through
    the issuance of additional shares of our common stock or other
    equity securities, and may cause you to lose part or all of your
    investment in our shares of common stock.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">We have
    broad discretion in the use of the proceeds of this offering and
    may apply the proceeds in ways with which you do not agree or
    which cause our stock price to decline.</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    A significant portion of our net proceeds from this offering
    will be used, as determined by management in its sole
    discretion, for working capital and general corporate purposes.
    Our management will have broad discretion over the use and
    investment of these net proceeds, and, accordingly, you will
    have to rely upon the judgment of our management with respect to
    our use of these net proceeds, with only limited information
    concerning management&#146;s specific intentions. You will not
    have the opportunity, as part of your investment decision, to
    assess whether we use the net proceeds from this offering
    appropriately. We may place the net proceeds in investments that
    do not produce income or that lose value, which may cause our
    stock price to decline.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Our
    directors, executive officers and significant stockholders will
    continue to have substantial control over us after this offering
    and could limit your ability to influence the outcome of key
    transactions, including changes of control.</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We anticipate that our directors and executive officers and
    their affiliated entities will, in the aggregate, beneficially
    own&#160;&#160;&#160;&#160;&#160;% of our outstanding common
    stock following the completion of this offering, assuming the
    underwriters do not exercise their option to purchase additional
    shares. In addition, Kips Bay Investments, LLC will beneficially
    own&#160;&#160;&#160;&#160;&#160;% and Mr.&#160;Villafa&#241;a,
    our Chairman and Chief Executive Officer, will beneficially
    own&#160;&#160;&#160;&#160;&#160;% of our outstanding common
    stock following the completion of this offering, and together
    will be able to control or influence significantly all matters
    requiring approval by our stockholders. Our directors, executive
    officers, significant stockholders and affiliated entities, if
    acting together, would be able to control or influence
    significantly all matters requiring approval by our
    stockholders, including the election of directors and the
    approval of mergers or other significant corporate transactions.
    These stockholders may have interests that differ from yours,
    and they may vote in a way with which you disagree and that may
    be adverse to your interests. The concentration of ownership of
    our common stock may have the effect of delaying, preventing or
    deterring a change of control of our company, could deprive our
    stockholders of an opportunity to receive a premium for their
    common stock as part of a sale of our company, and may affect
    the market price of our common stock. This concentration of
    ownership of our common stock may also have the effect of
    influencing the completion of a change in control that may not
    necessarily be in the best interests of all of our stockholders.
</DIV>
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<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">18</FONT></I>
</DIV><!-- END PAGE WIDTH -->
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Our
    charter documents and Delaware law may inhibit a takeover that
    stockholders consider favorable.</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Upon the closing of this offering, provisions of our certificate
    of incorporation and amended and restated bylaws and applicable
    provisions of Delaware law may make it more difficult for or
    prevent a third party from acquiring control of us without the
    approval of our board of directors. These provisions:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

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    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    set limitations on the removal of directors;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    limit who may call a special meeting of stockholders;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    establish advance notice requirements for nominations for
    election to our board of directors or for proposing matters that
    can be acted upon at stockholder meetings;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




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    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    do not permit cumulative voting in the election of our
    directors, which would otherwise permit less than a majority of
    stockholders to elect directors;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    prohibit stockholder action by written consent unless unanimous,
    thereby requiring all stockholder actions to be taken at a
    meeting of our stockholders; and
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    provide our board of directors the ability to designate the
    terms of and issue a new series of preferred stock without
    stockholder approval.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In addition, Section&#160;203 of the Delaware General
    Corporation Law generally limits our ability to engage in any
    business combination with certain persons who own 15% or more of
    our outstanding voting stock or any of our associates or
    affiliates who at any time in the past three years have owned
    15% or more of our outstanding voting stock. These provisions
    may have the effect of entrenching our management team and may
    deprive you of the opportunity to sell your shares to potential
    acquirers at a premium over prevailing prices. This potential
    inability to obtain a control premium could reduce the price of
    our common stock.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">You will
    experience immediate and substantial dilution in the net
    tangible book value of the common stock you purchase in this
    offering.</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    If you purchase common stock in this offering, you will incur
    immediate dilution of $&#160;&#160;&#160;&#160;&#160; in as
    adjusted net tangible book value per share of common stock,
    based on an assumed initial public offering price of $ per
    share, the midpoint of the range on the front cover of this
    prospectus, because the price that you pay will be substantially
    greater than the as adjusted net tangible book value per share
    of common stock that you purchase. This dilution is due in large
    part to the fact that our earlier investors paid substantially
    less than the price of the shares being sold in this offering
    when they purchased their shares of our common stock. In
    addition, if outstanding options to purchase our common stock
    are exercised, you will experience additional dilution.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">We do not
    intend to declare dividends on our common stock after this
    offering, and you should not expect to receive dividends on your
    common stock for the foreseeable future.</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We currently intend to retain all future earnings for the
    operation and expansion of our business and, therefore, do not
    anticipate declaring or paying cash dividends on our common
    stock in the foreseeable future. Any payment of cash dividends
    on our common stock will be at the discretion of our board of
    directors and will depend upon our results of operations,
    earnings, capital requirements, financial condition, future
    prospects, contractual restrictions and other factors deemed
    relevant by our board of directors. Therefore, you should not
    expect to receive dividend income from shares of our common
    stock.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">We
    anticipate future losses and may require additional financing,
    and our failure to obtain additional financing when needed could
    force us to delay, reduce or eliminate our product development
    programs or commercialization efforts.</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We expect to incur losses for the foreseeable future, and we may
    require financing in addition to the proceeds of this offering
    in order to satisfy our capital requirements. In particular, we
    may require additional capital in order to continue to conduct
    the research and development and obtain regulatory clearances
    and approvals necessary to bring any future products to market
    and to establish effective marketing and sales capabilities for
    existing and future products. Additional funds may not be
    available when we need them on terms that are acceptable to us,
    or
</DIV>
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<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">19</FONT></I>
</DIV><!-- END PAGE WIDTH -->
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    at all. If adequate funds are not available on a timely basis,
    we may terminate or delay the development of our eSVS MESH, or
    delay establishment of sales and marketing capabilities or other
    activities necessary to commercialize our eSVS MESH.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our future capital requirements will depend on many factors,
    including:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

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    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the costs of expanding our distribution network and our
    manufacturing operations;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the degree of success we experience in commercializing our eSVS
    MESH;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the number and types of future products we develop and
    commercialize;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the costs, timing and outcomes of regulatory reviews associated
    with our future product candidates;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the costs of preparing, filing and prosecuting patent
    applications and maintaining, enforcing and defending
    intellectual property-related claims; and
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the extent and scope of our general and administrative expenses.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Raising
    additional capital may cause dilution to our stockholders or
    restrict our operations.</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    To the extent that we raise additional capital through the sale
    of equity or convertible debt securities, your ownership
    interest will be diluted, and the terms may include liquidation
    or other preferences that adversely affect your rights as a
    stockholder. Debt financing, if available, may involve
    agreements that include covenants limiting or restricting our
    ability to take specific actions such as incurring additional
    debt, making capital expenditures or declaring dividends. Any of
    these events could adversely affect our ability to achieve our
    product development and commercialization goals and harm our
    business.
</DIV>
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<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">20</FONT></I>
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<A name='103'>
<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Special Note
    Regarding Forward-Looking Statements</FONT></B>
</DIV>
</A>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 2pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    This prospectus, including the sections entitled
    &#147;Prospectus Summary,&#148; &#147;Risk Factors,&#148;
    &#147;Management&#146;s Discussion and Analysis of Financial
    Condition and Results of Operations&#148; and
    &#147;Business,&#148; contains forward-looking statements that
    involve risks and uncertainties. In some cases, you can identify
    forward-looking statements by the following words:
    &#147;anticipate,&#148; &#147;believe,&#148;
    &#147;continue,&#148; &#147;could,&#148; &#147;estimate,&#148;
    &#147;expect,&#148; &#147;intend,&#148; &#147;may,&#148;
    &#147;ongoing,&#148; &#147;plan,&#148; &#147;potential,&#148;
    &#147;predict,&#148; &#147;project,&#148; &#147;should,&#148;
    &#147;will,&#148; &#147;would,&#148; or the negative of these
    terms or other comparable terminology, although not all
    forward-looking statements contain these words. These statements
    involve known and unknown risks, uncertainties and other factors
    that may cause our or our industry&#146;s results, levels of
    activity, performance or achievements to be materially different
    from the information expressed or implied by these
    forward-looking statements. Although we believe that we have a
    reasonable basis for each forward-looking statement contained in
    this prospectus, we caution you that these statements are based
    on a combination of facts and factors currently known by us and
    our projections of the future, about which we cannot be certain.
    Many important factors affect our ability to achieve our
    objectives, including:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



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    <TD width="95%"></TD>
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    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    our ability to commercialize our eSVS MESH technology;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    our ability to obtain and maintain foreign and domestic
    regulatory approval of our eSVS MESH technology;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    our ability to obtain coverage and reimbursement from
    third-party payors for our eSVS MESH technology and the extent
    of such coverage;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the successful development of our distribution and marketing
    capabilities;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




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    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    our ability to attract and retain scientific, regulatory, and
    sales and marketing support personnel;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    our ability to obtain and maintain intellectual property
    protection for our eSVS MESH technology;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    any future litigation regarding our business, including product
    liability claims;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




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    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    changes in governmental laws and regulations relating to
    healthcare;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




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    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the availability and cost of third-party products and the
    ability of our suppliers to timely meet our demands;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    changes affecting the medical device industry;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    general and economic business conditions;&#160;and
</TD>
</TR>


<TR style="line-height: 1pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the other risks described under &#147;Risk Factors&#148; in this
    prospectus.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 2pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    These factors could cause actual results to differ materially
    from the results anticipated by these forward-looking
    statements. You should read these risk factors and the other
    cautionary statements made in this prospectus as being
    applicable to all related forward-looking statements wherever
    they appear in this prospectus. We cannot assure you that the
    forward-looking statements in this prospectus will prove to be
    accurate. Furthermore, if our forward-looking statements prove
    to be inaccurate, the inaccuracy may be material. In light of
    the significant uncertainties in these forward-looking
    statements, you should not regard these statements as a
    representation or warranty by us or any other person that we
    will achieve our objectives and plans in any specified time
    frame, if at all.
</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    You should read this prospectus completely. Other than as
    required by law, we undertake no obligation to update these
    forward-looking statements, even though our situation may change
    in the future. We qualify all the forward-looking statements
    contained in this prospectus by the foregoing cautionary
    statements.
</DIV>

<DIV style="margin-top: 2pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Information and management estimates contained in this
    prospectus concerning the medical device industry and the
    coronary artery bypass graft market, including our general
    expectations and market position, market opportunity and market
    share, are based on publicly available information, such as
    clinical studies, academic research reports and other research
    reports. The management estimates are also derived from our
    internal research, using assumptions made by us that we believe
    to be reasonable and our knowledge of the industry and markets
    in which we operate and expect to compete. None of the sources
    cited in this prospectus has consented to the inclusion of any
    data from its reports, nor have we sought their consent. Our
    internal research has not been verified by any independent
    source, and we have not independently verified any third-party
    information. In addition, while we believe the market position,
    market opportunity and market share information included in this
    prospectus is generally reliable, such information is inherently
    imprecise. Such data involves risks and uncertainties and are
    subject to change based on various factors, including those
    discussed under the heading &#147;Risk Factors.&#148;
</DIV>
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">21</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<A name='104'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Use of
    Proceeds</FONT></B>
</DIV>
</A>

<DIV style="margin-top: 8pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Assuming an initial public offering price of
    $&#160;&#160;&#160;&#160;&#160; per share, the midpoint of the
    range on the front cover of this prospectus, we estimate our net
    proceeds from the sale
    of&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;shares
    of our common stock in this offering will be
    $&#160;&#160;&#160;&#160;&#160;&#160;million, after deducting
    the estimated underwriting discounts and commissions and our
    estimated offering expenses payable by us.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    If the underwriters exercise their option to purchase additional
    shares in full, we estimate that our net proceeds from this
    offering will be $&#160;&#160;&#160;&#160;&#160;&#160;million,
    after deducting the estimated underwriting discounts and
    estimated offering expenses payable by us. A $1.00 increase or
    decrease in the assumed initial public offering price of
    $&#160;&#160;&#160;&#160;&#160; per share would increase or
    decrease the net proceeds to us from this offering by
    $&#160;&#160;&#160;&#160;&#160;&#160;million, assuming the
    number of shares offered by us, as set forth on the front cover
    of this prospectus, remains the same and after deducting the
    estimated underwriting discounts and commissions and estimated
    offering expenses payable by us.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We intend to use the net proceeds from this offering primarily
    for the following purposes:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    approximately $15.0&#160;million to fund the process of seeking
    regulatory approval to market our eSVS MESH in the United States
    and abroad, including human clinical trials in the United States;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    approximately $&#160;&#160;&#160;&#160;&#160;&#160;million to
    fund the development and testing of additional applications of
    our eSVS MESH;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    from $5.0&#160;million to $10.0&#160;million to fund certain
    milestone payments payable to Medtronic, Inc. for the assignment
    of certain intellectual property rights to our eSVS
    MESH;&#160;and
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the remainder for working capital and general corporate
    purposes, including commercialization activities for our eSVS
    MESH in select European and other international markets and for
    the purchase of capital equipment and expansion of facilities.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The amounts we actually expend in these areas may vary
    significantly from our expectations and will depend on a number
    of factors, including operating costs and capital expenditures.
    Accordingly, management will retain broad discretion in the
    allocation of the net proceeds of this offering. You will not
    have the opportunity to evaluate the economic, financial or
    other information on which we base our decisions on how to use
    the proceeds. A portion of the net proceeds may also be used to
    acquire or invest in complementary businesses, technologies,
    services or products. We have no current plans, agreements or
    commitments with respect to any such acquisition or investment,
    and we are not currently engaged in any negotiations with
    respect to any such transaction.
</DIV>

<A name='105'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Dividend
    Policy</FONT></B>
</DIV>
</A>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have never declared or paid cash dividends on our capital
    stock. Following the completion of this offering, we intend to
    retain our future earnings, if any, to finance the further
    development and expansion of our business and do not expect to
    pay cash dividends in the foreseeable future. Payment of future
    cash dividends, if any, will be at the discretion of our board
    of directors after taking into account various factors,
    including our financial condition, operating results, current
    and anticipated cash needs, outstanding indebtedness and plans
    for expansion and restrictions imposed by lenders, if any.
</DIV>
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">22</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<A name='106'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Capitalization</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 15pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The following table sets forth our capitalization as of
    December&#160;31, 2009 on:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    an actual basis;&#160;and
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    an as adjusted basis to reflect the receipt of the net proceeds
    from the sale
    of&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;shares
    of common stock in this offering at an assumed initial public
    offering price of $&#160;&#160;&#160;&#160;&#160; per share, the
    midpoint of the range on the front cover of this prospectus,
    after deducting the estimated underwriting discounts and
    commissions and estimated offering expenses payable by us.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    You should read this capitalization table together with our
    financial statements and the related notes appearing elsewhere
    in this prospectus, as well as &#147;Management&#146;s
    Discussion and Analysis of Financial Condition and Results of
    Operations&#148; and other financial information included in
    this prospectus.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="73%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="10%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="8" nowrap align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" nowrap align="center" valign="bottom">
    <B>As of December&#160;31,<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2009</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Actual</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>As Adjusted(1)</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Stockholders&#146; equity:
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Common stock, $0.01&#160;par value, 40,000,000 common shares and
    10,000,000 undesignated shares authorized, 12,398,919 common
    shares issued and outstanding,
    actual;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;shares
    authorized,&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;issued
    and outstanding, as adjusted
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    124
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Additional paid-in capital
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    11,556
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Accumulated other comprehensive gain
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    33
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Deficit accumulated during development stage
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (9,201
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Total stockholders&#146; equity
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,512
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Total capitalization
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    2,512
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="9" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
<TR valign="bottom">
<TD colspan="9" align="right" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 8pt">(In thousands, except share and per
    share data)
    </FONT>
</DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>    (1)&#160;</TD>
    <TD align="left">
    A $1.00 increase or decrease in the assumed initial public
    offering price would result in an approximately
    $&#160;&#160;&#160;&#160;&#160;&#160;million increase or
    decrease in as adjusted additional paid-in capital, as adjusted
    total stockholders&#146; equity and as adjusted total
    capitalization, assuming the number of shares offered by us, as
    set forth on the front cover of this prospectus, remains the
    same and after deducting the estimated underwriting discounts
    and commissions and estimated offering expenses payable by us.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The outstanding share information in the table above is based on
    the number of shares outstanding as of December&#160;31, 2009,
    and excludes:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    598,000&#160;shares of common stock issuable upon the exercise
    of outstanding stock options as of December&#160;31, 2009 at a
    weighted average exercise price of $3.08 per share;&#160;and
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    1,401,000 additional shares of common stock reserved and
    available for future issuances under our 2007 Long-Term
    Incentive Plan.
</TD>
</TR>

</TABLE>
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">23</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<A name='107'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Dilution</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    If you invest in our common stock, your ownership interest will
    be diluted to the extent of the difference between the initial
    public offering price per share of our common stock and the as
    adjusted net tangible book value per share of our common stock
    immediately after completion of this offering.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    As of December&#160;31, 2009, we had a net tangible book value
    of $2.5&#160;million, or $0.20 per share of common stock. Net
    tangible book value per share is equal to our total tangible
    assets (total assets less intangible assets) less our total
    liabilities divided by the number of shares of common stock
    outstanding.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    After giving effect to our sale of shares of common stock at an
    assumed initial public offering price of
    $&#160;&#160;&#160;&#160;&#160; per share, the midpoint of the
    range on the front cover of this prospectus, deducting the
    estimated underwriting discounts and commissions and offering
    expenses, the as adjusted net tangible book value of our common
    stock, as of December&#160;31, 2009, would have been
    $&#160;&#160;&#160;&#160;&#160;&#160;million, or
    $&#160;&#160;&#160;&#160;&#160; per share. This amount
    represents an immediate increase in net tangible book value to
    our existing stockholders of $&#160;&#160;&#160;&#160;&#160; per
    share and an immediate dilution to new investors of
    $&#160;&#160;&#160;&#160;&#160; per share.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The following table illustrates this dilution on a per share
    basis:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<CENTER style="font-size: 1pt; width: 100%; border-bottom: 1pt solid #000000"></CENTER>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="77%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="7%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="7%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Assumed initial public offering price per share
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Historical net tangible book value per share as of
    December&#160;31, 2009
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;0.20
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Increase in net tangible book value per share attributable to
    new investors purchasing shares in this offering
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    As adjusted net tangible book value per share after this offering
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Dilution per share to new investors in this offering
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="9" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    A $1.00 increase or decrease in the assumed initial public
    offering price of $&#160;&#160;&#160;&#160;&#160; per share
    would increase or decrease, respectively, our as adjusted net
    tangible book value by
    $&#160;&#160;&#160;&#160;&#160;&#160;million, the as adjusted
    net tangible book value per share by
    $&#160;&#160;&#160;&#160;&#160; per share and the dilution in
    the net tangible book value to investors in this offering by
    $&#160;&#160;&#160;&#160;&#160; per share, assuming the number
    of shares offered by us, as set forth on the cover page of this
    prospectus, remains the same and after deducting the estimated
    underwriting discounts and commissions and estimated offering
    expenses payable by us.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The following table summarizes, as of December&#160;31, 2009, on
    an as adjusted basis, the number of shares of common stock
    purchased from us, the total consideration paid to us and the
    average price per share paid by our existing stockholders and by
    new investors, based upon an assumed initial public offering
    price of $&#160;&#160;&#160;&#160;&#160; per share, the midpoint
    of the range on the front cover of this prospectus, and before
    deducting estimated underwriting discounts and commissions and
    offering expenses payable by us.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="46%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="6%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="5%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="7%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=05 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=05 type=lead -->
    <TD width="5%" align="right">&nbsp;</TD>	<!-- colindex=05 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=05 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=06 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=06 type=lead -->
    <TD width="7%" align="right">&nbsp;</TD>	<!-- colindex=06 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=06 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="20" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Weighted<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Shares Purchased</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Total Consideration</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Average Price<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Number</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Percent</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Amount</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Percent</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>per Share</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Existing stockholders
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    New investors
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Total
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;100
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;100
</TD>
<TD nowrap align="left" valign="bottom">
    %&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="21" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    A $1.00 increase or decrease in the assumed initial public
    offering price of $&#160;&#160;&#160;&#160;&#160; per share
    would increase or decrease, respectively, total consideration
    paid by new investors and total consideration paid by all
    stockholders by approximately
    $&#160;&#160;&#160;&#160;&#160;&#160;million, assuming that the
    number of shares offered by us, as set forth on the front cover
    of this prospectus, remains the same.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In the preceding tables, the shares of common stock outstanding
    exclude, as of December&#160;31, 2009:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    598,000&#160;shares of common stock issuable upon exercise of
    stock options outstanding as of December&#160;31, 2009 at a
    weighted average exercise price of $3.08 per share;
</TD>
</TR>

</TABLE>
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">24</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    1,401,000 additional shares of common stock reserved and
    available for future issuances under our 2007 Long-Term
    Incentive Plan;&#160;and
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    shares of our common stock that may be purchased by the
    underwriters to cover over-allotments, if any.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    If the underwriters exercise their option to purchase additional
    shares in full:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the number of shares of our common stock held by existing
    stockholders would decrease to&#160;&#160;&#160;&#160;&#160;% of
    the total number of shares of our common stock outstanding after
    this offering;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the number of shares of our common stock held by new investors
    would increase to&#160;&#160;&#160;&#160;&#160;% of the total
    number of shares of our common stock outstanding after this
    offering;&#160;and
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    our as adjusted net tangible book value at December&#160;31,
    2009 would have been
    $&#160;&#160;&#160;&#160;&#160;&#160;million, or
    $&#160;&#160;&#160;&#160;&#160; per share of common stock,
    representing an immediate increase in as adjusted net tangible
    book value of $&#160;&#160;&#160;&#160;&#160; per share of
    common stock to our existing stockholders and an immediate
    dilution of $&#160;&#160;&#160;&#160;&#160; per share to
    investors purchasing shares in this offering.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Because we expect the exercise prices of the outstanding options
    to be significantly below the assumed initial public offering
    price of $&#160;&#160;&#160;&#160;&#160; per share, the midpoint
    of the range on the front cover of this prospectus, investors
    purchasing common stock in this offering will suffer additional
    dilution when and if these options are exercised. If the options
    exercisable for 598,000&#160;shares of common stock were
    exercised prior to this offering, but assuming no exercise of
    the underwriters&#146; option to purchase additional shares, our
    existing stockholders would, after this offering,
    own&#160;&#160;&#160;&#160;&#160;% of the total number of
    outstanding shares of our common stock while
    contributing&#160;&#160;&#160;&#160;&#160;% of the total
    consideration for all shares, and our new investors would
    own&#160;&#160;&#160;&#160;&#160;% of the total number of
    outstanding shares of our common stock while
    contributing&#160;&#160;&#160;&#160;&#160;% of the total
    consideration for all shares.
</DIV>
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">25</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<A name='108'>
</A>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Selected
    Financial Data</FONT></B>
</DIV>

<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The following table summarizes our selected financial data for
    the periods and as of the dates indicated. The selected
    financial data should be read in conjunction with, and are
    qualified by reference to, our financial statements and related
    notes and &#147;Management&#146;s Discussion and Analysis of
    Financial Condition and Results of Operations&#148; appearing
    elsewhere in this prospectus. The statements of operations data
    for the period from May&#160;1, 2007 (inception) through
    December&#160;31, 2007, the years ended December&#160;31, 2008
    and 2009, and the period from May&#160;1, 2007 (inception)
    through December&#160;31, 2009, and the balance sheet data at
    December&#160;31, 2008 and 2009, are derived from the audited
    financial statements included elsewhere in this prospectus. The
    balance sheet data at December&#160;31, 2007 is derived from
    audited financial statements not included in this prospectus.
    The historical results are not necessarily indicative of results
    to be expected in any future period.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="42%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="13%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="7%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=05 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=05 type=lead -->
    <TD width="11%" align="right">&nbsp;</TD>	<!-- colindex=05 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=05 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="16" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Period from<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Period from<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>May&#160;1, 2007 (Date of<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>May&#160;1, 2007 (Date <BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Inception) to<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>of Inception) to<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>December&#160;31,<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Year Ended December&#160;31,</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>December&#160;31,<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2007</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2009</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2009</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <B>Statements of Operations Data:</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Operating expenses:
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Research and development
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    196
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    2,635
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    3,004
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;&#160;&#160;5,835
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Selling, general and administrative
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    381
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    754
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    779
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,914
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Operating loss
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (577
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (3,389
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (3,783
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (7,749
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Interest income
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    65
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    52
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    17
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    134
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Interest expense
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (164
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (390
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (181
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (735
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Impairment of available for sale securities
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (85
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (85
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Change in fair value of investor stock purchase option
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    610
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    610
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Net loss attributable to common stockholders
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (676
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (3,812
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (3,337
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (7,825
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Basic and diluted net loss per share
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (0.16
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (0.62
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (0.30
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Weighted average common shares outstanding&#151;basic and diluted
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    4,106,557
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    6,100,767
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    11,069,342
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="17" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD colspan="17" align="right" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 8pt">(In thousands, except share and per
    share amounts)
    </FONT>
</DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="62%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="12" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="10" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>As of December&#160;31,</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2007</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2009</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <B>Balance Sheet Data:</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Cash, cash equivalents, and short-term investments
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    2,370
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    1,124
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    3,417
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Working capital
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,262
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    607
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,226
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Total assets
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,637
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,452
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,740
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Long-term debt, net
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,770
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,862
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Total stockholders&#146; equity (deficit)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (305
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (2,016
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    2,512
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="13" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD colspan="13" align="right" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 8pt">(In thousands)
    </FONT>
</DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>
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    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">26</FONT></I>
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<A name='109'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Management&#146;s
    Discussion and Analysis of<BR>
    Financial Condition and Results of Operations</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>The following discussion of our financial condition and
    results of operations should be read in conjunction with the
    &#147;Selected Financial Data&#148; and our financial statements
    and the related notes included elsewhere in this prospectus.
    This discussion contains forward-looking statements, which are
    based on our assumptions about the future of our business. Our
    actual results will likely differ materially from those
    contained in the forward-looking statements. Please read
    &#147;Special Note Regarding Forward-Looking Statements&#148;
    included elsewhere in this prospectus for additional information
    regarding forward-looking statements used in this prospectus.</I>
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Overview</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We are a medical device company focused on developing,
    manufacturing and commercializing our innovative external
    saphenous vein support technology, or eSVS MESH, for use in
    coronary artery bypass grafting, or CABG, surgery. Our eSVS MESH
    is a nitinol mesh sleeve that, when placed over a saphenous vein
    graft during CABG surgery, is designed to improve the structural
    characteristics and long-term performance of the vein graft.
    CABG surgery is one of the most commonly performed surgeries in
    the United States, with the American Heart Association
    estimating that 448,000 CABG procedures were performed in the
    United States in 2006. In addition, the Millennium Research
    Group estimates that there will be 165,000 CABG procedures per
    year in Europe by 2013. In CABG procedures, surgeons harvest
    blood vessels, including the internal mammary artery from the
    chest and the saphenous vein from the leg, and attach the
    harvested vessels to bypass, or provide blood flow around,
    blocked coronary arteries. We believe the use of our eSVS MESH
    with saphenous vein grafts in CABG surgery will improve the
    long-term outcome of CABG procedures, including improved
    openness, or patency, and improved blood flow characteristics
    through the saphenous vein graft, resulting in a reduced need
    for costly and potentially complicated reoperations or
    revascularization procedures.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have completed enrollment in a 90&#160;patient multi-center
    clinical trial conducted outside the United States. The primary
    effectiveness endpoint of this trial is statistical
    non-inferiority of the patency of eSVS MESH vessels as compared
    to control vessels at nine-months post-implant. Effectiveness
    data, which is based on angiographic patency, is being collected
    at this time. Preliminary safety data has indicated that our
    eSVS MESH and implant procedure do not result in an increase in
    patient complications during or after surgery. We completed
    enrollment in this trial in July 2009, and as of March&#160;1,
    2010, all 90&#160;patients have been implanted for six months or
    more, 83&#160;patients have been implanted for nine months or
    more, and 50&#160;patients have been implanted for
    12&#160;months or more. This trial formed the basis for our CE
    Mark application submitted in February 2010.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We expect to receive CE Mark approval and to begin marketing our
    eSVS MESH in select European Union markets in the second half of
    2010. The U.S.&#160;Food and Drug Administration, or FDA, is
    reviewing our application for an investigational device
    exemption, or IDE, which, if granted, will allow us to begin
    clinical trials of our eSVS MESH in the United States. We are
    currently amending our IDE application and anticipate obtaining
    IDE approval in the first half of 2010, and if approved, we
    expect to commence enrollment in our IDE trial in the second
    half of 2010. We anticipate beginning enrollment in a United
    States IDE trial in the second half of 2010. We could be delayed
    by adverse clinical results or regulatory complications, and we
    may never receive marketing approval.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We were incorporated and commenced operations in May 2007. Since
    our inception, we have generated losses. From inception to
    December&#160;31, 2009, we had an accumulated deficit of
    $9.2&#160;million. We have not generated any revenue from
    operations to date and we will not generate any revenue from
    operations until we receive our CE Mark and begin selling our
    eSVS MESH in select European Union markets. We expect to incur
    losses for the foreseeable future as we pursue the development
    and commercialization of our eSVS MESH. Our activities since
    inception have consisted principally of acquiring product and
    technology rights, raising capital, performing research and
    development and conducting preclinical and clinical trials.
    Accordingly, we are considered to be a development stage company
    as of December&#160;31, 2009. Successful completion of our
    development programs and, ultimately, the attainment of
    profitable operations are dependent on future events, including,
    among other things, our ability to obtain regulatory approval
    and achieve commercial adoption of our eSVS MESH.
</DIV>
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    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">27</FONT></I>
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Key Components of
    Our Results of Operations</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Research and
    Development Expenses</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Since our inception, we have focused our activities on the
    development of our eSVS MESH. We expense both internal and
    external research and development costs as incurred. Research
    and development costs include the costs to design, develop,
    test, seek approval for, and enhance our eSVS MESH and
    production processes. Expenses related to research and
    development consist primarily of personnel costs, including
    salaries, benefits and stock-based compensation; product
    development; preclinical and clinical trials; professional
    service fees; materials and supplies; and facilities-related
    costs. We expense amounts paid to obtain patents or acquire
    licenses, as the ultimate recoverability of the amounts paid is
    uncertain.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    While our research and development expenses to date have been
    focused on product development and evaluating the feasibility of
    our eSVS MESH, we expect that a large percentage of our research
    and development expenses in the future will be incurred in
    support of our current and future clinical trials. These
    expenditures are subject to numerous uncertainties in timing and
    costs to complete. As we obtain results from clinical trials, we
    may elect to discontinue or delay clinical trials for certain
    product applications or programs in order to focus our resources
    on more promising product applications. Completion of clinical
    trials may take several years or more, but the length of time
    generally varies according to the type, complexity, novelty and
    intended use of a product. The cost of clinical trials may vary
    significantly over the life of the trial as a result of
    differences arising during the clinical trial, including:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the number of sites included in the clinical trials;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the length of time required to enroll suitable patient subjects;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the number of patients that participate in the clinical
    trials;&#160;and
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the duration of patient
    <FONT style="white-space: nowrap">follow-up.</FONT>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our expenses related to clinical trials are based on estimates
    of the services received and efforts expended pursuant to
    contracts with multiple clinical trial sites and contract
    research organizations, or CROs, that administer clinical trials
    on our behalf. The financial terms of these agreements are
    subject to negotiation and vary from contract to contract and
    may result in uneven payment flows. Generally, these agreements
    set forth the scope of work to be performed at a fixed fee or
    unit price. Payments under the contracts depend on factors such
    as the successful enrollment of patients and the completion of
    clinical trial milestones. Expenses related to clinical trials
    generally are accrued based on contracted amounts and the
    achievement of milestones, such as number of patients enrolled.
    If timelines or contracts are modified based upon changes to the
    clinical trial design or scope of work to be performed, we
    modify our estimates of accrued expenses accordingly.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We anticipate the cost of completing our U.S.&#160;clinical
    trial will be approximately $15.0&#160;million, based upon our
    current expectation for the trial design. Because of the
    numerous risks and uncertainties associated with developing
    medical devices, we are unable to determine the duration and
    completion costs of our development projects or when and to what
    extent sales of our eSVS MESH will commence and become
    significant.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Selling,
    General and Administrative Expenses</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our selling, general and administrative expenses consist
    primarily of salaries and benefits and other costs, including
    stock-based compensation, for our executive and administrative
    personnel; legal and other professional fees; business
    development; insurance and other corporate costs. After
    completion of this offering, we anticipate incurring a
    significant increase in general and administrative expenses as
    we operate as a public company. These increases will likely
    include increased costs for insurance, costs related to the
    hiring of additional personnel and payments to outside
    consultants, lawyers and accountants. We also expect to incur
    significant costs to comply with the corporate governance,
    internal controls and similar requirements applicable to public
    companies. While our selling, general and administrative
    expenses to date have been primarily comprised of general and
    administrative costs, we expect that we will incur significant
    additional sales and marketing expenses as we prepare for and
    commence commercialization of our eSVS MESH.
</DIV>
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    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">28</FONT></I>
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Interest
    Income</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Interest income consists of interest earned on investments in
    certificates of deposits and money market accounts.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Interest
    Expense</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Interest expense results from interest associated with secured
    convertible notes in the aggregate principal amount of
    $3.0&#160;million, or the Notes. Our reported interest expense
    includes interest payable in cash based upon the stated rate in
    the Notes and the amortization of discount recorded on the Notes
    created by the allocation of a portion of the Note proceeds to
    the fair value of the stock purchase options granted in
    conjunction with the issuance of the Notes and due to the
    beneficial conversion feature specified in the Notes. Beneficial
    conversion feature accounting rules require the recognition of
    the intrinsic value of the conversion feature at the time of the
    Notes&#146; issuance, which is then amortized as additional
    interest expense over the life of the Notes.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Critical
    Accounting Policies and Estimates</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our management&#146;s discussion and analysis of financial
    condition and results of operations is based on our financial
    statements, which have been prepared in accordance with
    accounting principles generally accepted in the United States,
    or GAAP. The preparation of these financial statements requires
    us to make estimates and judgments that affect the reported
    amounts of assets, liabilities and expenses. On an ongoing
    basis, we evaluate these estimates and judgments, including
    those described below. We base our estimates on our historical
    experience and on various other assumptions that we believe to
    be reasonable under the circumstances. These estimates and
    assumptions form the basis for making judgments about the
    carrying values of assets and liabilities that are not readily
    apparent from other sources. Actual results and experiences may
    differ materially from these estimates.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    While our significant accounting policies are more fully
    described in Note&#160;2 to our financial statements included at
    the end of this prospectus, we believe that the following
    accounting policies are the most critical to aid you in fully
    understanding and evaluating our reported financial results and
    affect the more significant judgments and estimates that we use
    in the preparation of our financial statements.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Research and
    Development Expenses</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We expense research and development costs, including clinical
    trial costs, when incurred, consistent with the guidance of FASB
    ASC 730, <I>Research and Development</I>. All of our clinical
    trials are performed at clinical trial sites and are
    administered by CROs. We accrue costs for clinical trials
    performed by CROs based on estimates of work performed under the
    contracts. Costs of setting up clinical trial sites are accrued
    immediately. Expenses related to clinical trials generally are
    accrued based on contracted amounts and the achievement of
    milestones, such as number of patients enrolled.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    All material clinical trial and CRO contracts are terminable by
    us upon written notice and we are generally only liable for
    actual effort expended by the CROs and certain non-cancelable
    expenses incurred at any point of termination.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Stock-Based
    Compensation</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Stock-based incentive awards are accounted for under the
    provisions of FASB ASC 718, <I>Compensation&#151;Stock
    Compensation</I>, which requires companies to measure and
    recognize the cost of employee and non-employee services
    received in exchange for awards of equity instruments based on
    the grant date fair value of those awards. Compensation cost is
    recognized ratably using the straight-line attribution method
    over the expected vesting period, which is considered to be the
    requisite service period. In addition, we are required to
    estimate the amount of expected forfeitures when calculating the
    compensation costs, instead of accounting for forfeitures as
    incurred. All of our options previously awarded were classified
    as equity instruments and continue to maintain their equity
    classification.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The fair value of options is estimated at the date of grant
    using the Black-Scholes option pricing model with the
    assumptions described in the following sentences. Risk free
    interest rates are based upon U.S.&#160;Treasury rates
    appropriate for the expected term. Expected volatility and
    forfeiture rates are based on the volatility rates of a set
</DIV>
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    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">29</FONT></I>
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    of guideline companies, which consist of public and recently
    public medical technology companies. The assumed dividend yield
    is zero, as we do not expect to declare any dividends in the
    foreseeable future. The expected term is determined using the
    simplified method allowed by SEC Staff Accounting
    Bulletin&#160;No.&#160;110. The fair market value of the common
    stock underlying the stock options has been determined by our
    board of directors at each award grant date based upon a variety
    of factors, as discussed below. If we had made different
    assumptions and estimates, the amount of our recognized and to
    be recognized stock-based compensation expense could have been
    materially different. We believe that we have used reasonable
    methodologies, approaches and assumptions in determining the
    fair market value of our common stock.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Significant
    Factors, Assumptions and Methodologies Used in Determining Fair
    Market Value of Common Stock</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The following table summarizes by ranges of grant date, the
    number of shares subject to options granted in 2007, 2008 and
    2009 and the associated per share exercise price, estimated fair
    market value and ASC Topic 718 Black-Scholes Value. The exercise
    prices were set by our board of directors at prices believed to
    equal the fair market value of our common stock at each of the
    grant dates, taking into account all information available at
    those times. We did not obtain any third party contemporaneous
    valuations.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="38%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="11%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="7%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="11%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=05 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=05 type=lead -->
    <TD width="14%" align="right">&nbsp;</TD>	<!-- colindex=05 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=05 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="16" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>ASC Topic 718 Black-<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Date Range of Option Grants</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Number of Shares</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Exercise Price</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Fair Market Value</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Scholes Value</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    September 2007 through February 2008
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    349,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;1.00
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;1.00
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;0.52 - $0.55
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    March 2008
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    10,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2.00
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2.00
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1.07
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    June 2008 through January 2009
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    219,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    5.83
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    5.83
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2.81 - 3.20
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    September 2009
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    40,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    6.00
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    6.00
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2.99
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="17" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    A brief narrative of the factors considered in estimating the
    fair market value of our common stock as of the date of each
    grant and the option exercise price is set forth below. The
    factors generally included, but were not limited to, the most
    recent purchase prices of our common stock issued to third
    parties in arms-length transactions, the lack of marketability
    of our common stock, the progress of our product development,
    the progress of our preclinical and clinical testing, and the
    risks associated with the completion of our business plan.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <I><FONT style="font-family: 'Times New Roman', Times">September
    2007 through February 2008</FONT></I>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The estimated fair market value of our common stock as
    determined by our board of directors was $1.00 from September
    2007 through February 2008. The estimated fair value of $1.00
    primarily reflects the issuance of the Notes in July 2007, which
    were convertible into common stock at $0.625 per share, and
    continued progress towards the product development of our eSVS
    MESH, including the first successful manufacturing of our eSVS
    MESH and the commencement of negotiations for our Assignment and
    License Agreement with Medtronic.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <I><FONT style="font-family: 'Times New Roman', Times">March
    2008</FONT></I>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The estimated fair market value of our common stock as
    determined by our board of directors was $2.00 per share in
    March 2008. The increase in the estimated fair market value
    primarily reflects continued progress toward the product
    development of our eSVS MESH, including the first successful
    implants of our eSVS MESH in a preclinical trial in February
    2008.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <I><FONT style="font-family: 'Times New Roman', Times">June 2008
    through January 2009</FONT></I>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The estimated fair market value of our common stock as
    determined by our board of directors was $5.83 per share from
    June 2008 through January 2009. The increase in the estimated
    fair market value reflects the exercise in May 2008 of a stock
    purchase option by a third party, pursuant to which we issued
    600,000&#160;shares of common stock at a purchase price of $5.83
    per share. We issued this stock purchase option in July 2007,
    and it became exercisable by its terms following our
    determination that our eSVS MESH was suitable for human
    implantation. Please see
</DIV>
<!-- XBRL Paragraph Pagebreak -->
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">30</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    &#147;Certain Relationships and Related Party
    Transactions&#151;Investment Agreement with Kips Bay
    Investments, LLC&#148; for a description of the stock purchase
    option.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <I><FONT style="font-family: 'Times New Roman', Times">September
    2009</FONT></I>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The estimated fair market value of our common stock as
    determined by our board of directors was $6.00 per share in
    September 2009. The increase in estimated fair market value
    reflects the sale of 516,241&#160;shares of common stock to
    third party investors in August 2009 at $6.00 per share.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Results
    of Operations</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Comparison of
    the Year Ended December&#160;31, 2008 with the Year Ended
    December&#160;31, 2009</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="71%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="6%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="6%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="3%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="12" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Year Ended December&#160;31,</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Percent<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2009</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Change</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Operating expenses:
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Research and development
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;2,635
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;3,004
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    14.0
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Selling, general and administrative
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    754
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    779
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3.3
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 30pt">
    Total operating expenses
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,389
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,783
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    11.6
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Other income (expense):
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Interest income
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    52
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    17
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (67.3
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Interest expense
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (390
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (181
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (53.6
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Impairment of available for sale securities
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (85
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Gain from change in market value of investor option agreement
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    610
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Net loss
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (3,812
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (3,337
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (12.5
</TD>
<TD nowrap align="left" valign="bottom">
    )%
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="13" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD colspan="13" align="right" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 8pt">(In thousands)
    </FONT>
</DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Research and development and selling, general and administrative
    expenses include non-cash compensation expense as a result of
    our issuance of stock options. We expense the fair value of
    stock options over their vesting periods. The terms and vesting
    schedules for share-based awards vary by type of grant and the
    employment status of the grantee. The awards granted through
    December&#160;31, 2009 vest upon time-based conditions. We
    expect to record additional non-cash compensation expense in the
    future, which may be significant. The following table summarizes
    the stock-based compensation expense in our statement of
    operations for 2008 and 2009:
</DIV>

<DIV style="margin-top: 9pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="85%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="3%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="3%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="8" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>December&#160;31,</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2009</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Research and development
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;298
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;390
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Selling, general and administrative
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    40
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    47
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Total stock-based compensation
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    338
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    437
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="9" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
<TR valign="bottom">
<TD colspan="9" align="right" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 8pt">(In thousands)
    </FONT>
</DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <I><FONT style="font-family: 'Times New Roman', Times">Research
    and Development</FONT></I>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our research and development expenses increased 14.0% from
    $2.6&#160;million in 2008 to $3.0&#160;million in 2009. This
    increase was caused primarily by an increase of approximately
    $350,000 from 2008 to 2009 in the expenses associated with our
    international feasibility trial for our eSVS MESH, which began
    enrolling patients in August 2008. These expenses include per
    patient and per procedure fees payable to the clinical trial
    sites, clinical trial administration costs payable to a CRO, and
    costs related to the
    <FONT style="white-space: nowrap">set-up</FONT> of
    clinical trial sites and training of medical staff.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <I><FONT style="font-family: 'Times New Roman', Times">Selling,
    General and Administrative</FONT></I>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Selling, general and administrative expenses increased 3.3% from
    $754,000 in 2008 to $779,000 in 2009. This
</DIV>
<!-- XBRL Paragraph Pagebreak -->
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">31</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    increase was the result of an increase in salary expense related
    to the temporary addition of an individual performing marketing
    related work, partially offset by reduced travel expenses and
    professional fees.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <I><FONT style="font-family: 'Times New Roman', Times">Interest
    Income</FONT></I>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Interest income declined from $52,000 in 2008 to $17,000 in
    2009. This decline resulted primarily from decline in short-term
    interest rates from 2008 to 2009.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <I><FONT style="font-family: 'Times New Roman', Times">Interest
    Expense</FONT></I>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Interest expense declined from $390,000 in 2008 to $181,000 in
    2009. The Notes were converted into shares of common stock in
    February 2009, resulting in only two months of interest expense
    in 2009, as compared with a full year of interest in 2008. This
    decline was offset by the write-off of the $138,000 balance in
    unamortized discount on the Notes at the time of the conversion.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Comparison of
    the Period from May&#160;1, 2007 (Date of Inception) to
    December&#160;31, 2007 with the Year Ended December&#160;31,
    2008</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="47%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="13%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="13%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="13%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="12" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Period from<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>May&#160;1, 2007 (Date of<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Inception) to<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Year Ended<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>December&#160;31,</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>December&#160;31,</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Percent<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2007</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Change</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Operating expenses:
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Research and development
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;196
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;2,635
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,244.4
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Selling, general and administrative
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    381
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    754
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    97.9
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 30pt">
    Total operating expenses
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    577
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,389
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    487.3
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Other income (expense):
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Interest income
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    65
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    52
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (20.0
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Interest expense
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (164
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (390
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    137.8
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Impairment of available for sale securities
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (85
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 30pt">
    Net loss
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (676
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (3,812
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    463.9
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="13" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
<TR valign="bottom">
<TD colspan="13" align="right" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 8pt">(In thousands)
    </FONT>
</DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The following table summarizes the stock-based compensation
    expense in our statement of operations for 2007 and 2008:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="86%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="2%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="3%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="8" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>December 31,</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2007</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Research and development
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;14
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;298
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Selling, general and administrative
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    40
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Total stock-based compensation
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    16
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    338
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="9" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
<TR valign="bottom">
<TD colspan="9" align="right" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 8pt">(In thousands)
    </FONT>
</DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <I><FONT style="font-family: 'Times New Roman', Times">Research
    and Development</FONT></I>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our research and development expenses increased from $196,000 in
    2007 to $2.6&#160;million in 2008. Research and development
    expenses in 2007 were primarily comprised of personnel expenses
    of $150,000. In 2008, we operated for a full year and also
    expanded our research and development staff, which resulted in
    our personnel expenses, including stock-based compensation,
    increasing by approximately $1.2&#160;million. The balance of
    the increase related to expenses for the development of our eSVS
    MESH and the initiation of our international clinical trial.
    These expenses included product development, preclinical trials,
    clinical trial site selection, training and operation of our
    international clinical trial and intellectual property related
    costs.
</DIV>
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">32</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <I><FONT style="font-family: 'Times New Roman', Times">Selling,
    General and Administrative</FONT></I>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Selling, general and administrative expenses increased 97.9%
    from $381,000 in 2007 to $754,000 in 2009. This increase was
    primarily a function of having 12&#160;months of operations in
    2008, compared with seven months in 2007. In addition, we
    incurred approximately $80,000 in fees for an outside consultant
    working on certain marketing matters.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <I><FONT style="font-family: 'Times New Roman', Times">Interest
    Income</FONT></I>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Interest income declined 20.0% from $65,000 in 2007 to $52,000
    in 2008. This decline resulted from a decline in available cash
    and equivalents and short-term investments, which more than
    offset our having a full 12&#160;months during which interest
    was earned in 2008.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <I><FONT style="font-family: 'Times New Roman', Times">Interest
    Expense</FONT></I>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Interest expense increased 137.8% from $164,000 in 2008 to
    $390,000 in 2009. This increase resulted from the Notes being
    outstanding for the entire year in 2008, as compared with
    slightly more than five months in 2007.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <I><FONT style="font-family: Arial, Helvetica">Impairment of
    Available for Sale Investments</FONT></I>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In conjunction with a simplified employee retirement plan that
    we maintain for the benefit of our employees, we invested
    $250,000 in a mutual fund under an arrangement that resulted in
    reduced maintenance and transaction costs for our employees. Due
    primarily to the significant decline in the U.S.&#160;stock
    market and the accompanying declines in the U.S.&#160;economy
    during 2008, we concluded as of December&#160;31, 2008 that the
    value of this mutual fund investment was impaired and that this
    decline in value was other than temporary. We recorded a charge
    of $85,000, which resulted in a new adjusted cost basis for this
    investment. We had no other realized gains or losses in 2007 or
    2008.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Income
    Taxes</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Since inception, we have incurred operating losses and,
    accordingly, have not recorded a provision for income taxes for
    any of the periods presented. As of December&#160;31, 2009, we
    had net operating loss carryforwards for federal and state
    income tax purposes of approximately $6.5&#160;million. We also
    had federal research and development tax credit carryforwards of
    approximately $400,000. If not utilized, the federal net
    operating loss and tax credit carryforwards will expire
    beginning in 2027. Utilization of net operating loss and credit
    carryforwards may be subject to a substantial annual limitation
    due to limitations provided by the Internal Revenue Code of
    1986, as amended, that are applicable if we experience an
    &#147;ownership change&#148; that may occur, for example, as a
    result of this offering aggregated with certain other sales of
    our stock before or after this offering. If not utilized, the
    state net operating loss carryforward will expire beginning in
    2022. The annual limitation may result in the expiration of our
    net operating loss and tax credit carryforwards before they can
    be used.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Liquidity and
    Capital Resources</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The following table summarizes our liquidity and capital
    resources as of and for each of the last two fiscal years, and
    is intended to supplement the more detailed discussion that
    follows:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="83%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="3%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="5%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="8" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>December&#160;31,</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Liquidity and Capital Resources</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2009</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Cash and cash equivalents
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;943
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;2,469
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Short-term investments
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    181
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    948
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Working capital
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    607
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,226
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="9" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
<TR valign="bottom">
<TD colspan="9" align="right" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 8pt">(In thousands)
    </FONT>
</DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">33</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="51%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="9%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="6%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="6%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=05 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=05 type=lead -->
    <TD width="9%" align="right">&nbsp;</TD>	<!-- colindex=05 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=05 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="16" nowrap align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Period from<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Period from<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>May&#160;1, 2007<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>May&#160;1, 2007<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>(Date of<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>(Date of<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Inception)<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" nowrap align="center" valign="bottom">
    <B>Year Ended<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Inception)<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>to December&#160;31,<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>December&#160;31,</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>to December&#160;31,<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Cash Flow Data</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2007</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2009</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2009</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Cash provided by (used in):
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Operating activities
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;(505
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;(2,838
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
     $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;(3,382
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;(6,725
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Investment activities
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (760
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    196
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (840
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (1,404
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Financing activities
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,100
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,750
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    5,748
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    10,598
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 30pt">
    Net increase (decrease) in cash and cash equivalents
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    1,835
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (892
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    1,526
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    2,469
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="17" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
<TR valign="bottom">
<TD colspan="17" align="right" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 8pt">(In thousands)
    </FONT>
</DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Cash and Cash
    Equivalents</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our total cash resources, excluding short-term investments, as
    of December&#160;31, 2009 were $2.5&#160;million, compared to
    $943,000 as of December&#160;31, 2008. As of December&#160;31,
    2009, we had approximately $1.2&#160;million in current
    liabilities and $2.2&#160;million in net working capital. We
    incurred a net loss of $3.3&#160;million and had negative cash
    flow from operating activities of $3.4&#160;million for the year
    ended December&#160;31, 2009. Since May&#160;1, 2007 (date of
    inception) through December&#160;31, 2009, we had an accumulated
    deficit of $9.2&#160;million, while negative cash flow from
    operating activities has amounted to $6.7&#160;million. The
    difference between our accumulated deficit and negative cash
    flow from operations results primarily from the adoption of FASB
    ASC <FONT style="white-space: nowrap">815-40</FONT>
    on January&#160;1, 2009. Under the provisions of FASB ASC
    <FONT style="white-space: nowrap">815-40,</FONT>
    certain instruments previously reported as equity are now
    accounted for as derivative instruments. These provisions were
    initially applied by recording a non-cash, cumulative effect
    adjustment of $1.4&#160;million to retained earnings. Our
    accumulated deficit also includes non-cash charges for stock
    based compensation and depreciation of $791,000 and $118,000,
    respectively, and approximately $217,000 of accrued interest
    expense which was settled through conversion into our common
    stock.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    As we continue to pursue regulatory approvals, prepare for
    commercialization in international markets, develop our
    manufacturing capabilities and develop additional applications
    for our eSVS MESH, we expect to continue to incur substantial
    and increasing losses, which will continue to generate negative
    net cash flows from operating activities.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    To date, we have funded our operations primarily through private
    sales of common stock and convertible debt. As of
    December&#160;31, 2009, we had received net proceeds of
    approximately $7.6&#160;million from the sale of equity
    securities, and net proceeds of approximately $3.0&#160;million
    from the issuance of the Notes, all of which have been converted
    into common stock. We have not generated any revenue from
    operations to date and we will not generate any revenue from
    operations until we receive approval from the FDA, or an
    equivalent foreign regulatory body, to begin selling our eSVS
    MESH. We intend to use the net proceeds of this offering to seek
    regulatory approval to market our technology in the United
    States and abroad, including human clinical trials in the United
    States; to develop and test additional applications of our eSVS
    MESH; to make certain milestone payments for our acquired
    intellectual property; and for working capital and general
    corporate purposes. We may seek to raise additional funds
    through various sources, such as equity and debt financings, or
    through strategic collaborations and license agreements. We can
    give no assurances that we will be able to secure such
    additional sources of funds to support our operations, or if
    such funds are available to us, that such additional financing
    will be sufficient to meet our needs.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Net Cash Used
    in Operating Activities</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Net cash used in operating activities was $505,000 in 2007,
    $2.8&#160;million in 2008, and $3.4&#160;million in 2009. From
    May&#160;1, 2007 (date of inception) to December&#160;31, 2009,
    net cash used in operating activities was $6.7&#160;million. The
    net cash used in each of these periods primarily reflects the
    net loss for those periods, offset in part by depreciation,
    non-cash stock-based compensation and the effects of changes in
    operating assets and liabilities.
</DIV>
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<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">34</FONT></I>
</DIV><!-- END PAGE WIDTH -->
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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Net Cash
    Provided by (Used in) Investment Activities</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Net cash provided by (used in) investment activities was
    $(760,000) in 2007, $196,000 in 2008, and $(840,000) in 2009.
    From May&#160;1, 2007 (date of inception) to December&#160;31,
    2009, net cash used in investment activities was
    $1.4&#160;million. Cash used in investment activities is related
    to purchases and sales of short-term investments and purchases
    of property and equipment.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Net Cash
    Provided by Financing Activities</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Net cash provided by financing activities was $3.1&#160;million
    in 2007, $1.8&#160;million in 2008, $5.7&#160;million in 2009.
    From May&#160;1, 2007 (date of inception) to December&#160;31,
    2009, net cash provided by financing activities was
    $10.6&#160;million. Net cash provided by financing activities
    was primarily attributable to proceeds from issuances of the
    Notes and from private sales of our common stock.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Capital
    Requirements</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We expect to incur substantial expenses and generate significant
    operating losses as we continue to execute our business strategy
    including:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    collecting effectiveness data from our 90&#160;patient,
    multi-center clinical trial conducted outside the United States
    and seeking an IDE approval from the FDA to begin clinical
    trials in the United States;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    obtaining CE Mark approval;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    commercializing our eSVS MESH in select European markets;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    obtaining regulatory approval and commercializing our eSVS MESH
    in the United States;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    conducting clinical trials to expand indications for our eSVS
    MESH;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    hiring additional personnel for managerial, research and
    development, operations and other functions;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    expanding our facilities to increase our manufacturing and
    development capabilities;&#160;and
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    implementing new operational, financial and management systems
    to comply with SEC requirements.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our future capital uses and requirements depend on numerous
    forward-looking factors. These factors include the following:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the timing of our receipt of approval to sell in select European
    markets, if received at all;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    our ability to demonstrate safety and effectiveness of our eSVS
    MESH;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the selling price of our eSVS MESH to distributors and the price
    that distributors charge hospitals;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the rate of progress in establishing reimbursement arrangements
    with third-party payors;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the effect of competing technological and market developments;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the cost and delays in product development that may result from
    changes in regulatory oversight applicable to our eSVS MESH;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the costs involved in filing and prosecuting patent applications
    and enforcing or defending patent claims;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the cost of expanding our commercial operations, including our
    selling and marketing efforts;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    our ability to establish and maintain effective relationships
    with independent distributors;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the rate at which physicians adopt our eSVS MESH for use in CABG
    surgery;&#160;and
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the progress of preclinical and clinical trials required to
    support our applications for regulatory approvals, including our
    human clinical trials in the United States.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have not generated any revenue from operations to date. We do
    not expect to generate revenue unless or until we obtain
    regulatory approval of and commercialize our eSVS MESH. While
    there can be no guarantee, we anticipate commencing sales in
    select international markets by the end of the current fiscal
    year. However, we do not expect to generate meaningful sales in
    the current fiscal year and we expect our operating losses and
    negative
</DIV>
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<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">35</FONT></I>
</DIV><!-- END PAGE WIDTH -->
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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    cash flows from operations to continue for the foreseeable
    future. Our future capital requirements will depend upon a
    number of factors as indicated above.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We expect the proceeds of this offering, together with our
    existing resources as of the date of this prospectus, to be
    sufficient to fund our planned operations for at least the next
    12&#160;months. However, we may require significant additional
    funds earlier than we currently expect in order to conduct
    additional clinical trials to obtain regulatory approvals of our
    eSVS MESH. To the extent that we raise additional capital
    through the sale of equity or convertible debt securities,
    stockholders&#146; interest will be diluted, and the terms may
    include liquidation or other preferences that adversely affect
    the rights of our stockholders. Debt financing, if available,
    may involve agreements that include covenants limiting or
    restricting our ability to take specific actions such as
    incurring additional debt, making capital expenditures or
    declaring dividends. Any of these events could adversely affect
    our ability to achieve our product development and
    commercialization goals and harm our business.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    If adequate funds are not available, we may be required to
    terminate, significantly modify or delay our development
    programs, reduce our planned commercialization efforts, or
    obtain funds through collaborators that may require us to
    relinquish rights to our technologies or product candidates that
    we might otherwise seek to develop or commercialize
    independently. We may elect to raise additional funds even
    before we need them if the conditions for raising capital are
    favorable.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Contractual
    Obligations, Commitments and Contingencies</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    To date, we have not entered into long-term minimum purchase
    commitments with suppliers. Our principal commitments consist of
    obligations relating to our international clinical trial and
    obligations under the lease for our facility in Minneapolis,
    Minnesota, and certain office equipment.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The following table summarizes our outstanding contractual
    obligations as of December&#160;31, 2009:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
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    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=05 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=06 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=06 type=lead -->
    <TD width="2%" align="right">&nbsp;</TD>	<!-- colindex=06 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=06 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="20" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="18" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Payments Due by Period</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Less than<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>After<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Total</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>1&#160;Year</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>1-3&#160;Years</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>4-5&#160;Years</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>5&#160;Years</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    International clinical trial obligations(1)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;241
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;241
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Operating lease obligations(2)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    52
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    46
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    6
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Key supplier purchase commitment(3)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    43
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    43
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Total
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    336
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    330
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    6
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="21" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD colspan="21" align="right" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 8pt">(In thousands)
    </FONT>
</DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>    (1)&#160;
</TD>
    <TD align="left">    The outstanding obligations for our international clinical trial
    include our estimated costs to complete patient monitoring and
    <FONT style="white-space: nowrap">follow-up</FONT>
    and trial data collection and analysis for our 90&#160;patient
    multi-center clinical trial conducted outside the United States.
    Patient enrollment in this trial was completed in July 2009.
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>    (2)&#160;
</TD>
    <TD align="left">    Operating lease obligations represent future minimum lease
    payments under non-cancelable operating leases for our facility
    and certain office equipment. The operating lease obligation for
    our corporate facility ends September&#160;30, 2010. We are
    currently in negotiations with our landlord to renew this lease
    and secure additional space adjacent to our current offices. As
    of the date of this prospectus, we have not reached such an
    agreement with our landlord.
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>    (3)&#160;
</TD>
    <TD align="left">    The amount presented reflects the undelivered portion of an
    outstanding purchase order with one of our key suppliers. To
    date we have not entered into any long term supply agreements
    with any of our vendors. As of December&#160;31, 2009, remaining
    outstanding purchase orders were not significant.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Royalty
    Payments</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The core intellectual property relating to our eSVS MESH,
    including five patent applications pending in the United States
    and nine patent applications pending in countries outside the
    United States, was acquired from Medtronic, Inc. pursuant to an
    Assignment and License Agreement dated October&#160;9, 2007.
    Pursuant to the Assignment and License Agreement, Medtronic has
    also assigned to us certain patents relating to a brushed ePTFE
</DIV>
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<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">36</FONT></I>
</DIV><!-- END PAGE WIDTH -->
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    vascular graft, or the Brushed Graft Product, and licensed to us
    certain technology to produce platelet-poor plasma for use in
    connection with the Brushed Graft Product.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    As consideration for the assignment of intellectual property
    relating to the eSVS MESH and the Brushed Graft Product, we have
    agreed to pay Medtronic an aggregate of $20.0&#160;million upon
    the achievement of certain sales milestones relating to the eSVS
    MESH and the Brushed Graft Product and a royalty of 4% on sales
    of our eSVS MESH and the Brushed Graft Product. The royalty will
    terminate upon the earlier of the expiration of all of the
    patents and patent applications, or when the aggregate royalties
    paid reach $100.0&#160;million.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In the recitals to the Assignment and License Agreement, we
    stated that we would use our reasonable best efforts to develop
    and commercialize both the Brushed Graft Product and the eSVS
    MESH. While we have undertaken activities to develop and
    commercialize the Brushed Graft Product, we are currently
    primarily focused on the development of our eSVS MESH for use in
    CABG surgery and additional applications of our eSVS MESH. Any
    or all licenses granted to us pursuant to our agreement with
    Medtronic may be terminated and potentially all of the core
    intellectual property and patent rights related to our eSVS MESH
    shall revert to Medtronic, upon notice by Medtronic, (i)&#160;if
    we become insolvent, make an assignment for the benefit of
    creditors, go into liquidation or receivership or otherwise lose
    legal control of our business; and (ii)&#160;if we determine to
    cease commercializing either the Brushed Graft Product or our
    eSVS MESH, then Medtronic may terminate our license to patent
    rights related to the Brushed Graft Product or the patent rights
    related to our eSVS MESH, as applicable. If we cease
    commercialization of the Brushed Graft Product and not the eSVS
    MESH, we believe that Medtronic is entitled to terminate only
    the license to patent rights related to the Brushed Graft
    Product and not the patent rights related to the eSVS MESH.
    Similarly, if we cease commercialization of the eSVS MESH but
    not the Brushed Graft Product, we believe that Medtronic is
    entitled to cause the reversion of the patent rights related to
    the eSVS MESH but not terminate our license to patent rights
    related to the Brushed Graft Product. We recognize, however,
    that the terms of our agreement with Medtronic are susceptible
    to differing interpretations.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Off-Balance Sheet
    Arrangements</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Since inception, we have not engaged in any off-balance sheet
    activities as defined in
    <FONT style="white-space: nowrap">Regulation&#160;S-K</FONT>
    Item&#160;303(a)(4).
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Recent Accounting
    Pronouncements</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In June 2009, the FASB issued FASB ASC 105, <I>Generally
    Accepted Accounting Principles</I>, which establishes the FASB
    Accounting Standards Codification as the sole source of
    authoritative generally accepted accounting principles. Pursuant
    to the provisions of FASB ASC 105, we have updated references to
    GAAP in our financial statements issued for the period ended
    December&#160;31, 2009. The adoption of FASB ASC 105 did not
    impact our financial position or results of operations.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In June 2008, the FASB issued FASB ASC
    <FONT style="white-space: nowrap">815-40,</FONT>
    <I>Derivatives and Hedging</I>, which provides guidance on how
    to determine if certain instruments (or embedded features) are
    considered indexed to a company&#146;s own stock, including
    instruments similar to warrants to purchase the company&#146;s
    stock. FASB ASC
    <FONT style="white-space: nowrap">815-40</FONT>
    clarifies the determination of whether equity-linked instruments
    (or embedded features), such as our convertible notes or options
    to purchase our common stock, are considered indexed to our own
    stock, which would qualify as a scope exception and therefore be
    exempt from the application of FASB ASC 815. FASB ASC
    <FONT style="white-space: nowrap">815-40</FONT>
    became effective January&#160;1, 2009. Any outstanding
    instrument at the date of adoption requires a retrospective
    application of the accounting through a cumulative effect
    adjustment to retained earnings upon adoption. Our adoption of
    this guidance had a material impact on our financial position
    and results of operations, as described in Note&#160;6 to our
    financial statements.
</DIV>
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<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">37</FONT></I>
</DIV><!-- END PAGE WIDTH -->
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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<A name='110'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Business</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Overview</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We are a medical device company focused on developing,
    manufacturing and commercializing our innovative external
    saphenous vein support technology, or eSVS MESH, for use in
    coronary artery bypass grafting, or CABG, surgery. Our eSVS MESH
    is a nitinol mesh sleeve that, when placed over a saphenous vein
    graft during CABG surgery, is designed to improve the structural
    characteristics and long-term performance of the vein graft.
    CABG is one of the most commonly performed surgeries in the
    United States, with the American Heart Association estimating
    that 448,000 CABG procedures were performed in the United States
    in 2006. In addition, the Millennium Research Group, an
    independent market research firm, estimates that there will be
    165,000 CABG procedures per year in Europe by 2013. In CABG
    procedures, surgeons harvest blood vessels, including the
    internal mammary artery from the chest and the saphenous vein
    from the leg, and attach the harvested vessels to bypass, or
    provide blood flow around, blocked coronary arteries. The
    effectiveness of the procedure, however, is often limited by the
    failure rate of saphenous vein grafts, which has been shown in
    various studies to range from 6% to 30% one year after surgery
    and 60% ten years after surgery. Failure of these grafts,
    typically evidenced by partial or complete blockage and reduced
    or stopped blood flow, can lead to the need for further coronary
    interventions up to and including additional CABG procedures. We
    believe the use of our eSVS MESH with saphenous vein grafts in
    CABG surgery could improve the long-term outcome of CABG
    procedures, including improved openness, or patency, and
    improved blood flow through the saphenous vein graft, resulting
    in a reduced need for costly and potentially complicated
    reoperations or revascularization procedures.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    According to the American Heart Association, approximately
    17.6&#160;million people in the United States have coronary
    artery disease, and approximately 587,000&#160;people in the
    United States die each year as a result of the disease. In
    addition, according to a 2007 World Health Organization report,
    approximately 7.2&#160;million people worldwide died of coronary
    heart disease in 2002. The direct and indirect cost of coronary
    artery disease to the U.S.&#160;economy is estimated to be over
    $177&#160;billion in 2010. Physicians and patients may select
    among a variety of treatments to address coronary artery
    disease, including pharmaceutical therapy, balloon angioplasty,
    stenting with bare metal or drug-eluting stents, and CABG
    procedures, with the selection often depending upon the stage of
    the disease and the age of the patient. An independent study
    comparing CABG and implantation of drug-eluting stents shows
    that CABG is the more effective long-term treatment for coronary
    artery disease, achieving the best long-term patient outcomes as
    measured by survival rate and need for re-intervention
    12&#160;months after surgery. Moreover, patients with severe and
    multi-vessel coronary artery disease often cannot be effectively
    treated with methods other than CABG. The prevalence of coronary
    artery disease and the success rates for CABG procedures versus
    other treatments for coronary artery disease has made CABG
    surgery one of the most commonly performed surgeries in the
    United States. Based on a report published by the Millennium
    Research Group, moderate growth in coronary artery bypass
    procedures is expected in the United States through 2012 and in
    Europe through 2013, largely due to the increase in procedure
    volumes caused by rising rates of coronary artery disease and
    the need for repeat revascularizations.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    According to results published in the European Journal of
    Cardio-Thoracic Surgery in 2006, each CABG procedure involves an
    average of 3.3 bypass grafts, typically consisting of the left
    internal mammary artery, or LIMA, for one graft and the
    saphenous vein for the remaining 2.3 grafts per procedure.
    Saphenous vein grafts fail more frequently than LIMA grafts due
    to differences in structure and size of saphenous vein grafts as
    compared to LIMA grafts. Unlike the LIMA, which is a
    thick-walled artery intended to handle the high pressure blood
    flow from the heart, saphenous veins are thin-walled vessels
    that are intended for a low-pressure venous environment.
    Saphenous veins are also typically larger than the coronary
    arteries to which they are attached and this difference in size
    slows blood flow, adding stress to the vessel wall and
    increasing the risk of thrombosis, or blood clotting. When the
    vein grafts used to bypass a blocked artery are exposed to the
    high pressure of arterial flow, there is significant stress on
    the thin wall of the veins. The vein responds to this injury by
    causing its walls to thicken in a manner that often leads to
    failure of the bypass graft.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our eSVS MESH is a nitinol mesh sleeve that is placed over the
    saphenous vein graft during CABG surgery and is designed to
    constrict the vein and prevent expansion of the vein graft and
    resulting injury due to increased
</DIV>
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    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">38</FONT></I>
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    pressure. The constriction of the vein graft also causes the
    diameter of the graft, or lumen, to more closely match the
    diameter of the target coronary artery to which it is attached,
    thereby reducing blood flow disruption. Our eSVS MESH is
    designed to be applied quickly and is compatible with most
    current CABG surgery protocols. In addition, nitinol is commonly
    used in many other implantable medical devices.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have completed enrollment in a 90&#160;patient multi-center
    clinical trial conducted outside the United States. The primary
    effectiveness endpoint of this trial is statistical
    non-inferiority of the patency of eSVS MESH vessels as compared
    to control vessels at nine-months post-implant. Effectiveness
    data, which is based on angiographic patency, is being collected
    at this time. Preliminary safety data has indicated that our
    eSVS MESH and implant procedure do not result in an increase in
    patient complications during or after surgery. We completed
    enrollment in this trial in July 2009, and as of March&#160;1,
    2010, all 90&#160;patients have been implanted for six months or
    more, 83&#160;patients have been implanted for nine months or
    more, and 50&#160;patients have been implanted for
    12&#160;months or more. This trial formed the basis for our CE
    Mark application submitted in February 2010.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We expect to receive CE Mark approval and to begin marketing our
    eSVS MESH in select European Union markets in the second half of
    2010. The U.S.&#160;Food and Drug Administration, or FDA, is
    reviewing our application for an investigational device
    exemption, or IDE, which, if granted, will allow us to begin
    clinical trials of our eSVS MESH in the United States. We
    anticipate beginning enrollment in a United States IDE trial in
    the second half of 2010. We could be delayed by adverse clinical
    results or regulatory complications, and we may never receive
    marketing approval.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We are pursuing additional applications for our eSVS MESH,
    including applications for use in peripheral artery bypass
    surgery, for use with coronary allografts, and for use in
    arteriovenous, or AV, fistula dialysis applications. In
    peripheral artery bypass surgery, saphenous vein grafts are used
    to bypass obstructed arterial vessels in the legs. Coronary
    allografts are saphenous veins obtained from cadavers that are
    used in CABG procedures for patients who do not have appropriate
    arterial or venous conduits. An AV fistula is a surgically
    created connection, or fistula, between an artery and a vein
    used to provide access to the circulatory system of patients
    with kidney disease for chronic dialysis treatment. We believe
    that these applications could have significant commercial
    potential.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Our
    Strategy</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our objective is to achieve significant market adoption of our
    eSVS MESH technology in CABG and other vascular applications.
    Key elements of our strategy to achieve this objective include
    the following:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    <I>Work with respected medical centers and key thought leaders
    to demonstrate and communicate the potential benefits of our
    eSVS MESH.</I> We are in the process of collecting effectiveness
    data from our 90&#160;patient, multi-center trial conducted
    outside the United States and are currently seeking an IDE from
    the FDA to begin clinical trials in the United States. We
    believe that it will be important to increase the awareness of
    our eSVS MESH by collaborating with key opinion leaders at
    leading academic and medical institutions and supporting
    post-approval marketing studies and publication of peer-reviewed
    articles. We have formed clinical relationships with key
    surgeons at several leading cardiovascular surgery and CABG
    centers.
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    <I>Commercialize our eSVS MESH in select European markets.</I>
    We expect to receive CE Mark approval and to begin marketing our
    eSVS MESH in select European markets in the second half of 2010.
    We plan to engage independent distributors experienced in their
    respective European markets to promote and sell our eSVS MESH.
    Concurrent with this effort, we intend to commence activities to
    seek regulatory approval to begin marketing in other
    international markets.
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    <I>Obtain regulatory approval and commercialize our eSVS MESH in
    the United States.</I> The FDA is reviewing our application for
    an IDE, and we expect to receive approval to commence our IDE
    trial in the first half of 2010. We are in discussions with 12
    clinical trial sites to participate in our IDE trial, six of
    which have been engaged as of April&#160;1, 2010. We expect to
    commence enrollment in our IDE trial in the second half of 2010.
    Over the longer term, we will assemble data from our United
    States human clinical trial in support of an application for PMA
    approval from the FDA. If we receive the necessary regulatory
    approval, we plan to commercially introduce our eSVS MESH in the
    United States through independent distributors with access to
    key CABG centers and key physicians.
</TD>
</TR>

</TABLE>
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    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">39</FONT></I>
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    <I>Conduct trials to expand indications for our eSVS MESH.</I>
    We plan to begin preclinical trials in 2010 designed to provide
    proof of concept for the use of our eSVS MESH in peripheral
    artery bypass surgery, for use with coronary allografts, and for
    use with AV fistulas in dialysis patients.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Treatment of
    Coronary Artery Disease</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    According to the American Heart Association, approximately
    17.6&#160;million people in the United States have coronary
    artery disease, and approximately 587,000&#160;people in the
    United States die each year as a result of the disease. In
    addition, according to a 2007 World Health Organization report,
    approximately 7.2&#160;million people worldwide died of coronary
    heart disease in 2002. The direct and indirect cost of coronary
    artery disease to the U.S.&#160;economy is estimated to be over
    $177&#160;billion in 2010. Primary treatment options for
    coronary artery disease are pharmaceutical therapy, balloon
    angioplasty, intravascular stents, and CABG surgery. A
    description of each of these options is provided below:
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Pharmaceutical
    Therapy</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In patients with less severe disease, pharmaceuticals remain the
    primary treatment approach and include drugs such as platelet
    adhesion inhibitors or drugs that reduce the blood cholesterol
    or triglyceride levels. For more serious disease, however,
    pharmacological therapy alone is often inadequate.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Balloon
    Angioplasty</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Percutaneous transluminal coronary angioplasty, commonly
    referred to as balloon angioplasty, is a surgical procedure that
    involves the dilation of the obstructed artery with a balloon
    catheter. Angioplasty is generally successful in increasing
    immediate blood flow and, relative to current surgical
    procedures, offers the benefits of shorter periods of
    hospitalization, quicker recovery times, reduced patient
    discomfort and lower cost. However, according to a trial
    published in the journal Circulation in 2006, over 40% of
    vessels treated with balloon angioplasty return to their
    pre-treatment, narrowed size, a process known as restenosis,
    within six months following the procedure.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Intravascular
    Stents</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    High rates of restenosis following treatment by balloon
    angioplasty led to the introduction of stents, mesh-like
    metallic tubes that are placed within the narrowed portion of
    the coronary vessel to hold the vessel open after the
    angioplasty balloon has been removed. Although clinical outcomes
    for procedures using stents reflect an improvement over balloon
    angioplasty alone, the effectiveness of stents is still limited
    by restenosis, which for bare metal stents occurs in about 20%
    of cases within six months of the procedure.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Drug eluting stents are coated with specially formulated,
    slow-release drugs designed to prevent restenosis. According to
    the FDA in 2008, drug eluting stents were shown in clinical
    trials to reduce the rate of restenosis within one year after
    placement to 10%. Drug eluting stents are widely used, with a
    current market share relative to total stent usage in the range
    of 70%. However, some studies have been presented that associate
    drug eluting stents with late stage thrombosis, or clotting,
    which can be an adverse event.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Despite the advancements and market success of drug-eluting
    stents and angioplasty therapies, these interventional
    procedures may be less effective than surgical procedures in
    addressing diffuse progressive coronary artery disease. In this
    advanced stage of coronary artery disease, intervention is
    required for multiple vessels, many of which are less than two
    millimeters in internal diameter, a diameter currently
    unsuitable for angioplasty and stenting. In addition, stents
    have been shown to be difficult to place in patients with
    coronary lesions in sections with vessel branches and in
    patients with narrowings in the left main coronary artery. In a
    study published in the New England Journal of Medicine in
    January 2008 that compared drug-eluting stents with CABG in
    multivessel coronary disease, death rates and revascularization
    rates were higher in patients receiving drug-eluting stents than
    in patients receiving CABG, even though the cohort of patients
    receiving CABG was older and had more severe coronary disease.
</DIV>
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    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">40</FONT></I>
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">CABG
    Surgery</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Coronary Artery Bypass Grafting involves the construction of an
    alternative path to bypass a narrowed or occluded coronary
    artery and restore blood flow from the aorta to an area past the
    occlusion. This procedure is normally accomplished using
    saphenous veins from the leg and the LIMA from the chest as
    bypass grafts. Most commonly, the LIMA is utilized for bypassing
    the left anterior descending artery of the heart, or LAD, while
    saphenous veins are utilized for bypassing other coronary
    arteries.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    For vein grafts, one end of the harvested vessel is then
    generally attached to the aorta for blood inflow, and the
    opposite end is attached to the target coronary vessel. If a
    mammary artery is used as the bypass graft, it must be dissected
    from the chest wall, leaving one end in place on the aorta,
    while the opposite end is attached to the target vessel,
    providing uninterrupted blood flow from the arterial
    circulation. Once in place, these grafts provide sufficient
    blood flow to bypass the narrowed or occluded portion of the
    coronary artery. The following diagram illustrates the use of
    the internal mammary artery graft and saphenous vein graft in
    CABG surgery:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <IMG src="c56813c5681305.gif" alt="(FIGER)">
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Current
    Disadvantages of Saphenous Vein Grafts</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Since its first successful use in the 1960&#146;s, the saphenous
    vein graft has been one of the most commonly used conduits in
    CABG surgery. Some of the main advantages of using the saphenous
    vein include its ease of accessibility, its ease of handling,
    and the number of grafts, typically three, that can be
    constructed from a single vein. Despite these advantages and the
    widespread use of saphenous veins in CABG surgery, several
    issues have been identified, such as:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    Pressure normally exerted on veins is much lower than the
    pressure on arteries. Arterial pressure is normally
    <FONT style="white-space: nowrap">80-120</FONT> mm Hg
    while central venous pressure is normally about 3-7 mm Hg.
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    Veins do not have the strong muscular wall seen in arteries.
    Therefore, when placed under higher arterial pressures, the
    veins typically dilate, or expand.
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    Veins have large lumens as compared to arteries, resulting in a
    mismatch of lumen diameters when a saphenous vein graft is
    connected to a coronary artery. This size mismatch results in
    slow, sluggish blood flow in the vein graft with more stress
    placed on the wall of the vein due to blood volume.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The higher pressure of arterial blood flow and the size mismatch
    that results when a saphenous vein is used as a graft in CABG
    surgery often cause the vein to expand, damaging the lining of
    the vein. The vein responds to this damage by causing its walls
    to thicken in a manner that often leads to failure of the bypass
    graft. Smooth muscle cells proliferate in the middle layer of
    the vein wall and migrate to the inner surface of the vein in a
    process known as neointimal hyperplasia. The resulting
    accumulation of activated smooth muscle cells secrete
    inflammatory and growth factors leading to a stenotic
    <FONT style="white-space: nowrap">build-up</FONT> and
    graft failure over time. The failure rates of saphenous vein
    grafts
</DIV>
<!-- XBRL Paragraph Pagebreak -->
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">41</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    in CABG procedures is well documented in the scientific
    literature. A sampling of data from some of the larger benchmark
    studies is provided below:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="15%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="5%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="14%">&nbsp;</TD>	<!-- colindex=02 type=maindata -->
    <TD width="5%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="3%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="3%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="5%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
    <TD width="5%">&nbsp;</TD>	<!-- colindex=05 type=gutter -->
    <TD width="3%" align="right">&nbsp;</TD>	<!-- colindex=05 type=lead -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=05 type=body -->
    <TD width="3%" align="left">&nbsp;</TD>	<!-- colindex=05 type=hang1 -->
    <TD width="5%">&nbsp;</TD>	<!-- colindex=06 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=06 type=lead -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=06 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=06 type=hang1 -->
    <TD width="5%">&nbsp;</TD>	<!-- colindex=07 type=gutter -->
    <TD width="3%" align="right">&nbsp;</TD>	<!-- colindex=07 type=lead -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=07 type=body -->
    <TD width="3%" align="left">&nbsp;</TD>	<!-- colindex=07 type=hang1 -->
    <TD width="5%">&nbsp;</TD>	<!-- colindex=08 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=08 type=lead -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=08 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=08 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="27" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD colspan="27" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Saphenous Vein Graft Failure Rates</B>
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="7" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>1&#160;Year</B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="7" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>5&#160;Year*</B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="7" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>10&#160;Year*</B>
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Number of<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Failure<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Number of<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Failure<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Number of<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Failure<BR>
    </B>
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Year</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Author</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Patients</B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Rate</B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Patients</B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Rate</B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Patients</B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Rate</B>
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    1984
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    Barner, et al.
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    248
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    7
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    112
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    26
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    1996
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    Fitzgibbon, et al.
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3993
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    19
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1978
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    25
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    2004
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    Goldman, et al.
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    660
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    8
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    336
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    25
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    368
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    61
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    2005
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    Alexander
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    30
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    2009
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    Serruys, et al.
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    870
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    6
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    2009
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    Puskas, et al.
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    183
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    18
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="27" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    *&#160;Five and ten year data is not available for those studies
    for which data is not presented in these columns.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Failure of these grafts, typically evidenced by partial or
    complete blockage and reduced or stopped blood flow, can lead to
    chest pain, congestive heart failure, irregular heart beat,
    myocardial infarction, or MI, revascularization or death. A
    repeat of a CABG procedure to repair a failing or failed graft
    is a technically more difficult procedure with mortality rates
    three to five times higher than the original CABG procedure.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">eSVS
    MESH&#151;Our Solution</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our eSVS MESH is designed to improve the long-term outcome of
    CABG procedures by addressing limitations of unsupported
    saphenous veins. Our eSVS MESH is a highly flexible,
    semi-compliant, kink-resistant extravascular tubular prosthesis
    made of knitted nickel/titanium, or nitinol, wire mesh. Our eSVS
    MESH is designed to be fitted like a sleeve over vein grafts,
    thereby providing the vein graft with physiological attributes
    similar to those of an artery.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    An artery has a thick muscular wall to handle higher pressures,
    and a relatively small lumen that produces higher blood
    velocities, offering less chance for blood to pool and clot. In
    contrast, a vein has a thinner, less muscular wall due to the
    lower pressures normally found in veins and a larger lumen
    designed to maintain these lower pressures. We believe that
    larger, thinner-walled veins will have greater potential benefit
    from our eSVS MESH. Although we are pursuing commercialization
    of a 3.0 mm diameter eSVS MESH in select European markets, in
    the United States we will initially only be pursuing eSVS MESH
    diameters of 3.5, 4.0 and 4.5 mm.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our eSVS MESH is designed to provide the vein graft with
    physiological attributes similar to those of an artery by
    reducing the lumen diameter and strengthening the vessel wall.
    We believe the key benefits of our eSVS MESH technology include:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    Structural support designed to inhibit vessel expansion and
    resulting damage to the vessel, which can prevent a thickening
    of the vessel wall over time, or hyperplasia, and resulting
    graft failure.
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    Radial constriction designed to cause the diameter of the graft,
    or lumen, to be consistent in size and more closely match the
    diameter of the target coronary artery to which it is attached,
    thereby increasing blood flow velocities, reducing the potential
    for clot formation, and inhibiting hyperplasia.
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    Compatibility with current CABG procedures, including on-pump or
    off-pump procedures, and open or endoscopic vein harvest
    methods. Except for the placement of our eSVS MESH on the
    saphenous vein graft, the surgical steps to use a saphenous vein
    graft with our eSVS MESH are the same as would be performed for
    any coronary artery bypass procedure utilizing unsupported
    saphenous vein grafts. We do not expect, nor have we seen, a
    significant increase in CABG procedure time due to eSVS MESH use.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our eSVS MESH technology consists of the following:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    eSVS MESH (25 cm length, and either 3.0, 3.5, 4.0, or 4.5 mm in
    diameter);
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">42</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <IMG src="c56813c5681307.gif" alt="(FIGER)">
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    INTRODUCER for use in placing our eSVS MESH on the saphenous
    vein (one for each diameter of our eSVS MESH);
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <IMG src="c56813c5681308.gif" alt="(FIGER)">
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    SUTURE SNARE for use in loading our eSVS MESH onto the saphenous
    vein;&#160;and
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <IMG src="c56813c5681309.gif" alt="(FIGER)">
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    SIZING TOOL for use in choosing the correct device size based on
    saphenous vein diameter.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <IMG src="c56813c5681310.gif" alt="(FIGER)">
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Clinical
    Development of our eSVS MESH</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">International
    Human Clinical Trial</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The first human clinical trial of our eSVS MESH is a
    prospective, randomized, controlled non-inferiority trial, where
    each patient is randomized to receive a saphenous vein graft
    with our eSVS MESH to bypass either the right coronary artery,
    or RCA, or the circumflex artery, or Cx, two arteries commonly
    bypassed during CABG. The RCA or Cx saphenous vein graft not
    chosen to receive our eSVS MESH serves as the control artery. To
    ensure Good Clinical Practices compliance, outside resources are
    utilized for data collection and analysis, including a contract
    research organization for data entry and verification, a
    physician clinical events committee for the review and
    evaluation of adverse events, and an angiographic core lab for
    assessment of saphenous vein graft patency.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Seven international centers enrolled 90&#160;patients in this
    trial. Enrollment in this trial closed on July&#160;21, 2009. As
    of March&#160;1, 2010, all 90&#160;patients have been implanted
    for six months or more, 83&#160;patients have been implanted for
    nine months or more, and 50&#160;patients have been implanted
    for 12&#160;months or more.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The international sites involved in this trial, and the number
    of patients enrolled at each site, is provided below:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="84%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="12%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="4" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Number of Patients<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Center Name</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Enrolled</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Schleswig-Holstein University Hospital, Kiel, Germany
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    25
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    National University Hospital, Singapore
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    21
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    University Of Cape Town, Cape Town, South Africa
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    20
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Hospital Regional De Sion, Sion, Switzerland
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    9
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Auckland City Hospital, Auckland, New Zealand
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    8
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Hospital Universitario 12&#160;de Octubre, Madrid, Spain
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    5
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Prince Charles Hospital, Brisbane, Australia
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Total
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    90
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="5" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">43</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The primary safety endpoint of this trial is statistical
    non-inferiority based on the total rate of major adverse cardiac
    and cerebral events, or MACCE, at
    <FONT style="white-space: nowrap">30-days</FONT>
    post-implant as compared to published literature. MACCE is a
    composite of MI, stroke, revascularization, including surgery or
    stenting, and death. In summary, there were four adverse events
    that met the protocol definition of MACCE, which compared
    favorably to the protocol objective performance criteria, or
    OPC. OPC are performance criteria based on broad sets of data
    from historical databases, such as literature or registries,
    that are generally recognized as acceptable values. For this
    trial, the OPC utilized was a compilation of published
    literature that presented
    <FONT style="white-space: nowrap">30-day</FONT>
    post-implant MACCE rates for CABG surgery patients, separating
    the MACCE category into the composite factors listed above. In
    addition, none of the adverse events were determined to be
    &#147;Definitely Device Related&#148; or &#147;Probably Device
    Related.&#148;
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    A table summarizing these results is shown below:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="74%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="5%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="12%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="8" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Objective<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Trial Data</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Performance Criteria</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    MI
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2(2.2
</TD>
<TD nowrap align="left" valign="bottom">
    %)
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2.8
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Stroke
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2(2.2
</TD>
<TD nowrap align="left" valign="bottom">
    %)
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1.8
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Revascularization
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    0
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    0
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Death*
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    0
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    4.8
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Total
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    4(4.4
</TD>
<TD nowrap align="left" valign="bottom">
    %)
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    9.4
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="9" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    *&#160;One patient death eight months after surgery due to
    non-cardiac causes
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The primary effectiveness endpoint of this trial is statistical
    non-inferiority of angiographic stenosis, or patency, of eSVS
    MESH vessels as compared to control vessels at nine-months
    post-implant. A vessel is considered to be patent if there is
    less than 50% stenosis. Collection of this data is ongoing.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have made the following observations during this trial that
    have led to improvements in the device and implant procedure:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    One center had implant methods incompatible with our eSVS MESH.
    Specifically, surgeons at this site did not make an adequate
    lateral slit on the side of the saphenous vein graft that lies
    on the heart, or heel slit, in grafts that had our eSVS MESH,
    causing a higher than anticipated number of graft closures at
    the aortic anastomotic site, the location where the saphenous
    vein graft is sewn onto the aorta. By design, a saphenous vein
    graft with an eSVS MESH in place will not dilate. Without this
    heel slit in place, a saphenous vein graft with our eSVS MESH in
    place does not permit adequate blood flow into the vein graft at
    the aortic anastomotic site, potentially resulting in failure of
    the graft. We have modified our instructions for use to provide
    clear direction to surgeons on how to make the heel slit when
    using our eSVS MESH.
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    The amount of reduction in the diameter of the saphenous vein
    grafts, or downsizing, prescribed in our instructions for use
    and sizing tool was too aggressive, resulting in a higher than
    anticipated closure rate in saphenous vein grafts utilizing the
    smaller eSVS MESH diameters. This resulted in lumen diameters
    that were very small and did not remain patent. We have modified
    our instructions for use and sizing tool to decrease the amount
    of downsizing applied to saphenous vein grafts by our eSVS MESH.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">United States
    IDE Trial</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The FDA is reviewing our application for an IDE which, if
    granted, will allow us to begin clinical trials of our eSVS MESH
    in the United States. We are currently amending our IDE
    application and anticipate obtaining IDE approval in the first
    half of 2010, and if approved, we expect to commence enrollment
    in our IDE trial in the second half of 2010. The FDA has not
    approved our IDE submission and the summary below of the trial
    design is based upon our current expectations of the IDE
    protocol. The ultimate trial design, if and when approved by the
    FDA, may be materially different than our expectations set forth
    below.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We expect that the FDA will require a feasibility phase as part
    of our IDE trial. We are proposing that the first
    60&#160;patients enrolled in the trial will have a
    <FONT style="white-space: nowrap">90-day</FONT>
    post-implant assessment of device patency, in addition to normal
    <FONT style="white-space: nowrap">follow-ups</FONT>
    prescribed in the clinical trial protocol. We are also proposing
    that success criteria for this
</DIV>
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    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">44</FONT></I>
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    feasibility analysis be non-inferiority. Once the
    <FONT style="white-space: nowrap">90-day</FONT>
    <FONT style="white-space: nowrap">follow-up</FONT> is
    completed and the data is reported to the FDA, subject to FDA
    consent, we expect to continue enrollment at all sites and these
    feasibility phase patients will be included in the IDE trial
    data set. The feasibility phase will delay completion of our IDE
    trial by at least five to six months compared to a trial that
    does not incorporate a feasibility phase.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The primary safety endpoint of the IDE trial is expected to be
    statistical non-inferiority based on the total rate of major
    adverse cardiac events, or MACE, at
    <FONT style="white-space: nowrap">30-days</FONT>
    post-implant as compared to published literature. The primary
    effectiveness endpoint of this trial is expected to be
    statistical superiority of the patency of eSVS MESH vessels as
    compared to control vessels at nine-months post-implant. This
    effectiveness endpoint is more rigorous than the effectiveness
    endpoint of our international trial, which was a non-inferiority
    comparison. The IDE protocol reflects our prior observations
    from the international trial. For example, the IDE protocol will
    only include eSVS MESH sizes of 3.5 mm or greater in diameter
    and will include detailed instruction regarding preparation of
    anastomotic sites. We expect the IDE trial to require enrollment
    of 366&#160;patients and include up to 20 clinical trial sites.
    Of these 366&#160;patients, we expect that we will be required
    to perform nine-month post-implant angiograph procedures on at
    least 293&#160;patients. We would be dependent upon our clinical
    sites and enrolled subjects for compliance in returning and
    agreeing to the nine-month angiograms and expect that a certain
    percent of subjects will either not return or will refuse the
    nine-month angiogram. We are in discussions with 12 clinical
    trial sites to participate in our IDE trial, six of which have
    been engaged as of April&#160;1, 2010. We expect to commence
    enrollment in the IDE trial, in the second half of 2010.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Enrollment in the IDE trial is expected to take approximately
    18&#160;months, and
    <FONT style="white-space: nowrap">follow-up</FONT> is
    expected to take up to an additional year from the completion of
    enrollment. Prior to commercializing our eSVS MESH in the United
    States, we will be required to submit a Pre-Market Approval, or
    PMA, application to the FDA. Approval of a PMA by the FDA
    generally takes approximately one year after the application. We
    could be delayed by adverse clinical results or regulatory
    complications, and we may never receive marketing approval.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Preclinical
    Testing</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Preclinical trials of our eSVS MESH technology have been
    presented in peer-reviewed journals, including The Journal of
    Thoracic and Cardiovascular Surgery in February 2008 and the
    Journal of Vascular Surgery in June 2009. Between 2002 and 2007,
    Medtronic, Inc. sponsored multiphase trials with the
    Cardiovascular Research Unit of the Christiaan Barnard
    Department of Cardiothoracic Surgery at the University of Cape
    Town in South Africa, or UCT, to evaluate the effects of various
    designs of external nitinol mesh sleeves on the vascular
    architecture of vein grafts used in CABG and peripheral bypass
    procedures. This multiphase research concluded that the use of
    our eSVS MESH showed a statistically significant decrease in
    intimal hyperplasia after six months of implantation. In
    addition to these trials, Medtronic, Inc. and UCT collaborated
    on stress, fatigue, durability, and finite element analysis of
    knitted eSVS MESH designs.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In October 2007, we acquired ownership of the core intellectual
    property relating to our eSVS MESH from Medtronic, Inc. and
    initiated additional work on the technology. This work included
    developing additional sizes of our eSVS MESH, completing
    required preclinical and biological testing of the product and
    accessories, developing packaging and labeling for our eSVS
    MESH, and creating product documentation intended to comply with
    relevant FDA and international standards.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In addition, we initiated and completed a series of animal
    trials utilizing sheep to confirm that our eSVS MESH, as
    manufactured by us, performed as expected, and produced the
    expected results. These animal trials showed a statistically
    significant inhibition of the formation of intimal hyperplasia
    when our eSVS MESH was used with a saphenous vein graft in CABG
    procedures. However, sheep arterial pressures and vasculature
    differ from humans, and human clinical studies may not be
    consistent with animal trial results.
</DIV>
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    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">45</FONT></I>
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Additional eSVS
    MESH Applications</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Additional development projects based on our eSVS MESH
    technology that we are exploring and may advance include:
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Peripheral
    Grafts</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In this clinical application, saphenous vein grafts are used to
    bypass obstructed arterial vessels in the legs. We have
    conducted initial preclinical trials for this application,
    utilizing saphenous vein grafts with our eSVS MESH in place. We
    plan to conduct further preclinical trials of this application
    in 2010, in support of future potential regulatory submissions.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Coronary
    Allografts</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In this clinical application, cadaver, or allograft, saphenous
    vein grafts are used in CABG procedures for patients who do not
    have appropriate arterial or venous conduits. We have had
    discussions with suppliers of this allograft material to
    determine usage patterns. We plan to conduct initial preclinical
    trials of this application in 2010.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Arteriovenous
    Fistula</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In this clinical application, a fistula, or connection, is made
    between an artery and a vein, normally in the non-dominant arm,
    for circulatory system access in patients requiring chronic
    dialysis. We plan to conduct initial preclinical trials of this
    application in 2010.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Sales and
    Marketing</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Europe and
    Other International Markets</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have submitted an application to obtain the CE Mark for our
    eSVS MESH. If approved, the CE Mark will allow us to sell our
    eSVS MESH for use in CABG procedures in 32 countries within the
    European Union, the European Economic Area, and the European
    Free Trade Association. Provided we receive CE Mark approval, we
    plan to begin sales in select European nations beginning in the
    second half of 2010. Our plan is to utilize independent
    distributors to commercialize our technology in Europe, and we
    have identified independent distributors that may be contracted
    to conduct sales in these markets. These distributors will be
    supported by our
    <FONT style="white-space: nowrap">U.S.-based</FONT>
    staff with regard to training and promotional materials. We
    intend to work with our distributors with respect to product
    reimbursement and have also identified other third parties that
    may be contracted to assist in obtaining country-specific
    product reimbursement.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    As the European cardiac surgery market is characterized by
    centralized, high-volume cardiac surgery centers, we believe
    this market can be effectively addressed through a small,
    highly-focused independent distributor network.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We will be an active participant in post-market clinical trials
    aimed at validating the long-term outcomes of patients who
    receive our eSVS MESH. These studies will be designed to show
    that eSVS MESH patients require less revascularization
    procedures than standard CABG patients, thereby also reducing
    the costs associated with revascularization procedures for eSVS
    MESH patients. We envision that the results of these studies
    will be presented at scientific sessions and presented in
    peer-reviewed journals, thereby increasing the visibility and
    adoption of our eSVS MESH. These studies will also be used to
    support applications for public hospital reimbursement in those
    countries that require outcomes data for such reimbursement.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We believe that the CE Mark will also be a gateway approval that
    will allow us to begin regulatory submissions to obtain
    marketing approval in other select markets, including South
    Africa, Canada, Australia, New Zealand and Argentina.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">United
    States</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We are required to conduct a PMA IDE trial in the United States.
    Enrollment in this trial,
    <FONT style="white-space: nowrap">follow-up</FONT> of
    trial patients, and subsequent PMA approval are anticipated to
    take approximately three years. If the U.S.&#160;IDE trial is
</DIV>
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    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">46</FONT></I>
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    successful and our resulting PMA is approved, we expect to
    launch our eSVS MESH in the United States no sooner than 2013.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Based upon the 2009 Society of Thoracic Surgeons Adult Cardiac
    Surgery Database, we believe CABG surgeries were performed in
    approximately 1,150 U.S.&#160;hospitals in 2009.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    According to an article published in the journal Health Affairs
    in 2007, the volume of CABG surgeries performed per
    U.S.&#160;hospital in 2003 was:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="20%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="13%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="25%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="13%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="25%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="8" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>CABG Volume per Year</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Percent of Hospitals in this Category</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Number of Hospitals in this Category</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="center" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    &#060;130 cases
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    29
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    310
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="center" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="white-space: nowrap">130-199</FONT> cases
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    20
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    214
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="center" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="white-space: nowrap">200-314</FONT> cases
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    22
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    235
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="center" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="white-space: nowrap">315-484</FONT> cases
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    15
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    160
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="center" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    &#062;484 cases
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    14
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    150
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="9" align="center" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Based upon this information, approximately 545 hospitals in the
    United States perform at least 200 CABG surgeries each year. Of
    these, approximately 310 hospitals perform more than 315
    surgeries each year. Our initial marketing focus will be on
    these 300 to 500 hospitals.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our plan is to utilize independent distributors to commercialize
    our eSVS MESH in the U.S., and we have identified independent
    distributors that may be contracted to conduct sales. These
    distributors will be supported by Kips Bay staff with regard to
    training and promotional materials. We have contracted outside
    reimbursement experts to assist in obtaining Centers for
    Medicare&#160;&#038; Medicaid Services, or CMS, product
    reimbursement.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Intellectual
    Property</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    As of December&#160;31, 2009, we had six patent applications
    pending in the United States and nine patent applications
    pending in countries outside the United States covering various
    aspects of our eSVS MESH. We also have one international patent
    application pending, which gives us the opportunity to file in
    more individual countries. Some of our pending patent
    applications have been examined, and currently stand rejected.
    We will continue to pursue obtaining patents from these
    applications, but it is possible that our pending patent
    applications may not issue as patents or, if issued, may not
    issue in a form that will be advantageous to us. We expect to
    launch our eSVS MESH in Europe before any of our pending
    European patent applications issue as patents.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The core intellectual property relating to our eSVS MESH,
    including five patent applications pending in the United States
    and nine patent applications pending in countries outside the
    United States, was acquired from Medtronic, Inc. pursuant to an
    Assignment and License Agreement dated October&#160;9, 2007.
    Pursuant to the Assignment and License Agreement, Medtronic has
    also assigned to us certain patent rights relating to a brushed
    ePTFE vascular graft, or the Brushed Graft Product, and licensed
    to us certain technology to produce platelet-poor plasma for use
    in connection with the Brushed Graft Product.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    As consideration for the assignment of intellectual property
    relating to the eSVS MESH and the Brushed Graft Product, we have
    agreed to pay Medtronic an aggregate of $20.0&#160;million upon
    the achievement of certain sales milestones relating to the eSVS
    MESH and the Brushed Graft Product and a royalty of 4% on sales
    of our eSVS MESH and the Brushed Graft Product. The royalty will
    terminate upon the earlier of the expiration of all of the
    patents and patent applications, or when the aggregate royalties
    paid reach $100.0&#160;million. There is no assurance that any
    of these patent applications will issue as patents or that any
    such patent(s) will be effective to prevent a competitor from
    developing and using substantially equivalent technology.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In the recitals to the Assignment and License Agreement, we
    stated that we would use our reasonable best efforts to develop
    and commercialize both the Brushed Graft Product and the eSVS
    MESH. While we have undertaken activities to develop and
    commercialize the Brushed Graft Product, we are currently
    primarily focused on the development of our eSVS MESH for use in
    CABG surgery and additional applications of our eSVS MESH. Any
    or all licenses granted to us pursuant to our agreement with
    Medtronic may be terminated and potentially all of
</DIV>
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    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">47</FONT></I>
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    the core intellectual property and patent rights related to our
    eSVS MESH shall revert to Medtronic, upon notice by Medtronic,
    (i)&#160;if we become insolvent, make an assignment for the
    benefit of creditors, go into liquidation or receivership or
    otherwise lose legal control of our business; and (ii)&#160;if
    we determine to cease commercializing either the Brushed Graft
    Product or our eSVS MESH, then Medtronic may terminate our
    license to patent rights related to the Brushed Graft Product or
    the patent rights related to our eSVS MESH, as applicable. If we
    cease commercialization of the Brushed Graft Product and not the
    eSVS MESH, we believe that Medtronic is entitled to terminate
    only the license to patent rights related to the Brushed Graft
    Product and not the patent rights related to the eSVS MESH.
    Similarly, if we cease commercialization of the eSVS MESH but
    not the Brushed Graft Product, we believe that Medtronic is
    entitled to cause the reversion of the patent rights related to
    the eSVS MESH but not terminate our license to patent rights
    related to the Brushed Graft Product. We recognize, however,
    that the terms of our agreement with Medtronic are susceptible
    to differing interpretations.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Competition</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The development and commercialization of medical devices to
    treat cardiovascular disease is a highly competitive industry.
    If approved, our eSVS MESH will compete with current forms of
    treatment, including pharmaceutical treatment, balloon
    angioplasty, coronary stents and conventional CABG surgery.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The key competitive factors affecting the success of our eSVS
    MESH are likely to be the effectiveness, safety profile and
    price of our eSVS MESH, as compared to existing methods for the
    prevention or treatment of cardiovascular disease. The
    commercial success of our eSVS MESH will depend upon the results
    of clinical trials of the technology and experience with the
    technology in the commercial marketplace.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    If the commercialization of our eSVS MESH technology is
    successful, it can be expected that other medical device
    companies, many of whom are larger and have greater financial
    resources than us, will seek to enter into this market by
    introducing competing technologies.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Manufacturing and
    Suppliers</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We fabricate our eSVS MESH both at our facility and at a
    contract manufacturer. We conduct final assembly and packaging
    inside a controlled environment area within our facility that
    satisfies the requirements of a Class&#160;10,000 level clean
    room. We have implemented systems to ensure that our
    manufacturing operations comply with relevant United States and
    International Good Manufacturing Practices requirements.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have vendors for all of our key components and outsourced
    processes. We have no sole source suppliers and have identified
    alternate suppliers for each key component and outsourced
    process; however, in some cases, components are provided by
    single source suppliers at this time due to quality
    considerations, costs, or regulatory requirements. We have
    established redundancy for custom equipment used in the
    manufacture of our eSVS MESH. A third-party supplier performs
    sterilization services for our eSVS MESH. We currently use two
    knitting machines that knit the mesh sleeve of our eSVS MESH,
    with one located at our facility and the other located off-site.
    We intend to order two additional knitting machines in the first
    half of 2010. We believe that these four machines will produce
    sufficient quantities of our eSVS MESH to meet our expected
    needs for the foreseeable future. In the event that one or all
    of our knitting machines were to become unavailable, we believe
    that we can obtain one or more replacement knitting machines,
    although the custom work required to enable the machines to
    produce our eSVS MESH would likely result in some delays in our
    production process.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Research and
    Development</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    During 2007, 2008 and 2009, we incurred approximately $196,000,
    $2.6&#160;million and $3.0&#160;million, respectively, of
    research and development expenses. Research and development
    costs include the costs to design, develop, test, seek approval
    for, and enhance our eSVS MESH and production process. Expenses
    related to research and development consist primarily of
    personnel costs, including salaries, benefits and stock-based
    compensation, product development, pre-clinical and clinical
    trials, materials and supplies, and facilities-related costs.
    While our research and development expenses to date have been
    focused on product development and evaluating the feasibility of
    our eSVS MESH, we expect that a large percentage of our research
    and development expenses in the future will be incurred in
    support of our current and future clinical trials. As we develop
    further applications for
</DIV>
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    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">48</FONT></I>
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    our eSVS MESH, we intend to utilize internal resources, outside
    contract resources and facilities, and our Scientific Advisory
    Board.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Employees</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    As of March&#160;1, 2010, we had ten employees. We plan to
    continue to expand our research and development and
    commercialization activities. To support this growth, we will
    need to expand managerial, research and development, operations
    and other functions. None of our employees is represented by a
    labor union, and we consider our relationship with our employees
    to be good.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Facilities</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We lease approximately 5,000&#160;square feet of office,
    laboratory, manufacturing and warehouse space at 3405 Annapolis
    Lane North, Suite&#160;200, Minneapolis, Minnesota. The term of
    our lease expires on August&#160;31, 2010. Negotiations are
    underway to extend this lease and to secure additional space.
    Our corporate offices, research and development facilities,
    prototype development, manufacturing, warehousing, and shipping
    facilities are located at this facility.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Government
    Regulation</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">United States
    Medical Device Regulation</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Federal Food, Drug, and Cosmetic Act, or FDCA, and the
    FDA&#146;s implementing regulations, govern medical device
    design and development, preclinical and clinical testing,
    premarket clearance or approval, registration and listing,
    manufacturing, labeling, storage, advertising and promotion,
    sales and distribution, and post-market surveillance. Medical
    devices and their manufacturers are also subject to inspection
    by the FDA. The FDCA, supplemented by other federal and state
    laws, also provides civil and criminal penalties for violations
    of its provisions. We intend to manufacture and market a medical
    device that is regulated by the FDA, comparable state agencies
    and regulatory bodies in other countries.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our eSVS MESH will require marketing authorization from the FDA
    prior to commercial distribution in the United States. The two
    primary types of FDA marketing authorization are premarket
    notification (also called 510(k) clearance) and premarket
    approval (also called PMA approval). The type of marketing
    authorization applicable to a device&#151;510(k) clearance or
    PMA approval&#151;is generally linked to classification of the
    device. The PMA approval process is generally more stringent,
    time-consuming and expensive than the 510(k) clearance process.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The FDA classifies medical devices into one of three classes
    (Class&#160;I,&#160;II or III)&#160;based on the degree of risk
    FDA determines to be associated with a device and the extent of
    control deemed necessary to ensure the device&#146;s safety and
    effectiveness. Devices requiring fewer controls because they are
    deemed to pose lower risk are placed in Class&#160;I or II.
    Class&#160;I devices are deemed to pose the least risk and are
    subject only to general controls applicable to all devices, such
    as requirements for device labeling, premarket notification, and
    adherence to the FDA&#146;s current good manufacturing practice
    requirements, as reflected in its Quality System Regulation, or
    QSR. Class&#160;II devices are intermediate risk devices that
    are subject to general controls and may also be subject to
    special controls such as performance standards, product-specific
    guidance documents, special labeling requirements, patient
    registries or postmarket surveillance. Class&#160;III devices
    are those for which insufficient information exists to assure
    safety and effectiveness solely through general or special
    controls, and include life-sustaining, life-supporting, or
    implantable devices, and devices not &#147;substantially
    equivalent&#148; to a device that is already legally marketed.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Most Class&#160;I devices and some Class&#160;II devices are
    exempted by regulation from the 510(k) clearance requirement and
    can be marketed without prior authorization from FDA.
    Class&#160;I and Class&#160;II devices that have not been so
    exempted are eligible for marketing through the 510(k) clearance
    pathway. By contrast, devices placed in Class&#160;III generally
    require PMA approval prior to commercial marketing. To obtain
    510(k) clearance for a medical device, an applicant must submit
    a premarket notification to the FDA demonstrating that the
    device is &#147;substantially equivalent&#148; to a predicate
    device legally marketed in the United States. A device is
    substantially equivalent if, with respect to the predicate
    device, it has the same intended use and (1)&#160;the same
    technological characteristics, or (2)&#160;has different
    technological characteristics and the information submitted
    demonstrates that the device is as safe
</DIV>
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    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">49</FONT></I>
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    and effective as a legally marketed device and does not raise
    different questions of safety or effectiveness. A showing of
    substantial equivalence sometimes, but not always, requires
    clinical data. Generally, the 510(k) clearance process can
    exceed 90&#160;days and may extend to a year or more.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    After a device has received 510(k) clearance for a specific
    intended use, any modification that could significantly affect
    its safety or effectiveness, such as a significant change in the
    design, materials, method of manufacture or intended use, will
    require a new 510(k) clearance or (if the device as modified is
    not substantially equivalent to a legally marketed predicate
    device) PMA approval. While the determination as to whether new
    authorization is needed is initially left to the manufacturer,
    the FDA may review this determination and evaluate the
    regulatory status of the modified product at any time and may
    require the manufacturer to cease marketing and recall the
    modified device until 510(k) clearance or PMA approval is
    obtained. The manufacturer may also be subject to significant
    regulatory fines or penalties.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our coronary eSVS MESH has been designated a Class&#160;III
    product by the FDA and will be required to go through the PMA
    process. Other indications of our eSVS MESH, including
    peripheral and arteriovenous fistula applications, have not been
    classified at this time.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The FDA will require us to file a PMA application with respect
    to our eSVS MESH and there is no assurance that PMA approval
    will be granted. A PMA application requires the payment of
    significant User Fees, and must be supported by valid scientific
    evidence, which typically requires extensive data, including
    technical, preclinical, clinical and manufacturing data, to
    demonstrate to the FDA&#146;s satisfaction the safety and
    effectiveness of the device. A PMA application also must include
    a complete description of the device and its components, a
    detailed description of the methods, facilities and controls
    used to manufacture the device, and proposed labeling. After a
    PMA application is submitted and found to be sufficiently
    complete, the FDA begins an in-depth review of the submitted
    information. During this review period, the FDA may request
    additional information or clarification of information already
    provided. Also during the review period, an advisory panel of
    experts from outside the FDA may be convened to review and
    evaluate the application and provide recommendations to the FDA
    as to the approvability of the device. In addition, the FDA will
    conduct a pre-approval inspection of the manufacturing facility
    to ensure compliance with the QSR, which requires manufacturers
    to follow design, testing, control, documentation and other
    quality assurance procedures.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    FDA review of a PMA application is required by statute to take
    no longer than 180&#160;days, although the process typically
    takes significantly longer, and may require several years to
    complete. The FDA can delay, limit or deny approval of a PMA
    application for many reasons, including:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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    <TD width="95%"></TD>
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<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the device may not be safe or effective to the FDA&#146;s
    satisfaction;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the data from our preclinical trials and clinical trials may be
    insufficient to support approval;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the manufacturing process or facilities we use may not meet
    applicable requirements;&#160;and
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    changes in FDA approval policies or adoption of new regulations
    may require additional data.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    If the FDA evaluations of both the PMA application and the
    manufacturing facilities are favorable, the FDA will either
    issue an approval letter, or an approvable letter, which usually
    contains a number of conditions that must be met in order to
    secure final approval of the PMA. When and if those conditions
    have been fulfilled to the satisfaction of the FDA, the agency
    will issue a PMA approval letter authorizing commercial
    marketing of the device for certain indications. If the
    FDA&#146;s evaluation of the PMA or manufacturing facilities is
    not favorable, the FDA will deny approval of the PMA or issue a
    not approvable letter. The FDA may also determine that
    additional clinical trials are necessary, in which case the PMA
    approval may be delayed for several months or years while the
    trials are conducted and then the data submitted in an amendment
    to the PMA. The PMA process can be expensive, uncertain and
    lengthy and a number of devices for which FDA approval has been
    sought by other companies have never been approved for
    marketing. Even if a PMA application is approved, the FDA may
    approve the device with an indication that is narrower or more
    limited than originally sought. The agency can also impose
    restrictions on the sale, distribution, or use of the device as
    a condition of approval, or impose post approval requirements
    such as continuing evaluation and periodic reporting on the
    safety, effectiveness and reliability of the device for its
    intended use.
</DIV>
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    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">50</FONT></I>
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    New PMA applications or PMA supplements may be required for
    modifications to the manufacturing process, labeling, device
    specifications, materials or design of a device that is approved
    through the PMA process. PMA approval supplements often require
    submission of the same type of information as an initial PMA
    application, except that the supplement is limited to
    information needed to support any changes from the device
    covered by the original PMA application and may not require as
    extensive clinical data or the convening of an advisory panel.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Clinical trials are almost always required to support a PMA
    application and are sometimes required for a 510(k) clearance.
    These trials generally require submission of an application for
    an investigational device exemption, or IDE, to the FDA. The IDE
    application must be supported by appropriate data, such as
    animal and laboratory testing results, showing that it is safe
    to test the device in humans and that the testing protocol is
    scientifically sound. The IDE application must be approved in
    advance by the FDA for a specified number of patients, unless
    the product is deemed a non-significant risk device and eligible
    for more abbreviated IDE requirements. Generally, clinical
    trials for a significant risk device may begin once the IDE
    application is approved by the FDA and the trial protocol and
    informed consent are approved by appropriate institutional
    review boards at the clinical trial sites.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    FDA approval of an IDE allows clinical testing to go forward,
    but does not bind the FDA to accept the results of the trial as
    sufficient to prove the product&#146;s safety and effectiveness,
    even if the trial meets its intended success criteria. With
    certain exceptions, changes made to an investigational plan
    after an IDE is approved must be submitted in an IDE supplement
    and approved by the FDA (and by governing institutional review
    boards when appropriate) prior to implementation.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    All clinical trials must be conducted in accordance with
    regulations and requirements collectively known as Good Clinical
    Practice, or GCP. GCPs include the FDA&#146;s IDE regulations,
    which describe the conduct of clinical trials with medical
    devices, including the recordkeeping, reporting and monitoring
    responsibilities of sponsors and investigators, and labeling of
    investigation devices. They also prohibit promotion, test
    marketing, or commercialization of an investigational device,
    and any representation that such a device is safe or effective
    for the purposes being investigated. GCPs also include
    FDA&#146;s regulations for institutional review board approval
    and for protection of human subjects (informed consent), as well
    as disclosure of financial interests by clinical investigators.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Required records and reports are subject to inspection by the
    FDA. The results of clinical testing may be unfavorable or, even
    if the intended safety and effectiveness success criteria are
    achieved, may not be considered sufficient for the FDA to grant
    approval or clearance of a product. The commencement or
    completion of any of our clinical trials may be delayed or
    halted, or be inadequate to support approval of a PMA
    application or clearance of a premarket notification for
    numerous reasons, including, but not limited to, the following:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the FDA or other regulatory authorities do not approve a
    clinical trial protocol or a clinical trial (or a change to a
    previously approved protocol or trial that requires approval),
    or place a clinical trial on hold;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    patients do not enroll in clinical trials or follow up at the
    rate expected;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    institutional review boards and third-party clinical
    investigators may delay or reject our trial protocol or changes
    to our trial protocol;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    third-party clinical investigators decline to participate in a
    trial or do not perform a trial on our anticipated schedule or
    consistent with the clinical trial protocol, investigator
    agreements, good clinical practices or other FDA requirements;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    third-party organizations do not perform data collection and
    analysis in a timely or accurate manner;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    regulatory inspections of our clinical trials or manufacturing
    facilities, which may, among other things, require us to
    undertake corrective action or suspend or terminate our clinical
    trials;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    changes in governmental regulations or administrative actions;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the interim or final results of the clinical trial are
    inconclusive or unfavorable as to safety or
    effectiveness;&#160;and
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the FDA concludes that our trial design is inadequate to
    demonstrate safety and effectiveness.
</TD>
</TR>

</TABLE>
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    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">51</FONT></I>
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    After a device is approved and placed in commercial
    distribution, numerous regulatory requirements apply. These
    include:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    establishment registration and device listing;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the QSR, which requires manufacturers to follow design, testing,
    control, documentation and other quality assurance procedures;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    labeling regulations, which prohibit the promotion of products
    for unapproved or &#147;off-label&#148; uses and impose other
    restrictions on labeling;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    medical device reporting regulations, which require that
    manufacturers report to the FDA if a device may have caused or
    contributed to a death or serious injury or malfunctioned in a
    way that would likely cause or contribute to a death or serious
    injury if malfunctions were to recur;&#160;and
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    corrections and removal reporting regulations, which require
    that manufacturers report to the FDA field corrections and
    product recalls or removals if undertaken to reduce a risk to
    health posed by the device or to remedy a violation of the FDCA
    caused by the device that may present a risk to health.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Also, the FDA may require us to conduct postmarket surveillance
    studies or order us to establish and maintain a system for
    tracking our eSVS MESH through the chain of distribution to the
    patient level. The FDA enforces regulatory requirements by
    conducting periodic, announced and unannounced inspections and
    market surveillance. Inspections may include the manufacturing
    facilities of our subcontractors.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Failure to comply with applicable regulatory requirements,
    including those applicable to the conduct of our clinical
    trials, can result in enforcement action by the FDA, which may
    lead to any of the following sanctions:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

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    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    warning letters or untitled letters;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    fines and civil penalties;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    unanticipated expenditures;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    delays in clearing or approving or refusal to clear or approve
    products;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    withdrawal or suspension of FDA approval;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    product recall or seizure;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    orders for physician notification or device repair, replacement,
    or refund;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    production interruptions;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    operating restrictions;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    injunctions;&#160;and
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    criminal prosecution.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We and our contract manufacturers, specification developers and
    suppliers are also required to manufacture our eSVS MESH in
    compliance with current Good Manufacturing Practice requirements
    set forth in the QSR. The QSR requires a quality system for the
    design, manufacture, packaging, labeling, storage, installation
    and servicing of marketed devices, and includes extensive
    requirements with respect to quality management and
    organization, device design, buildings, equipment, purchase and
    handling of components, production and process controls,
    packaging and labeling controls, device evaluation,
    distribution, installation, complaint handling, servicing and
    record keeping. The FDA enforces the QSR through periodic
    announced and unannounced inspections that may include the
    manufacturing facilities of our subcontractors. If the FDA
    believes we or any of our contract manufacturers or regulated
    suppliers is not in compliance with these requirements, it can
    shut down our manufacturing operations, require recall of our
    eSVS MESH, refuse to clear or approve new marketing
    applications, institute legal proceedings to detain or seize
    products, enjoin future violations, or assess civil and criminal
    penalties against us or our officers or other employees. Any
    such action by the FDA would have a material adverse effect on
    our business.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Fraud and
    Abuse</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our operations will be directly, or indirectly through our
    customers, subject to various state and federal fraud and
</DIV>
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    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">52</FONT></I>
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    abuse laws, including, without limitation, the FDCA, federal
    Anti-Kickback Statute and False Claims Act. These laws may
    impact, among other things, our proposed sales, marketing and
    education programs. In addition, these laws require us to screen
    individuals and other companies, suppliers and vendors in order
    to ensure that they are not &#147;debarred&#148; by the federal
    government and therefore prohibited from doing business in the
    healthcare industry. The association or conduct of business with
    a &#147;debarred&#148; entity could be detrimental to our
    operations and result in a negative impact on our business.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The federal Anti-Kickback Statute prohibits persons from
    knowingly and willfully soliciting, offering, receiving or
    providing remuneration, directly or indirectly, in exchange for
    or to induce either the referral of an individual, or the
    furnishing or arranging for a good or service, for which payment
    may be made under a federal healthcare program such as the
    Medicare and Medicaid programs. Several courts have interpreted
    the statute&#146;s intent requirement to mean that if any one
    purpose of an arrangement involving remuneration is to induce
    referrals of federal healthcare covered business, the statute
    has been violated. The Anti-Kickback Statute is broad and
    prohibits many arrangements and practices that are lawful in
    businesses outside of the healthcare industry. Many states have
    also adopted laws similar to the federal Anti-Kickback Statute,
    some of which apply to the referral of patients for healthcare
    items or services reimbursed by any source, not only the
    Medicare and Medicaid programs.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The federal False Claims Act prohibits persons from knowingly
    filing or causing to be filed a false claim to, or the knowing
    use of false statements to obtain payment from, the federal
    government. Various states have also enacted laws modeled after
    the federal False Claims Act.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In addition to the laws described above, the Health Insurance
    Portability and Accountability Act of 1996 created two new
    federal crimes: healthcare fraud and false statements relating
    to healthcare matters. The healthcare fraud statute prohibits
    knowingly and willfully executing a scheme to defraud any
    healthcare benefit program, including private payors. The false
    statements statute prohibits knowingly and willfully falsifying,
    concealing or covering up a material fact or making any
    materially false, fictitious or fraudulent statement in
    connection with the delivery of or payment for healthcare
    benefits, items or services.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Voluntary industry codes, federal guidance documents and a
    variety of state laws address the tracking and reporting of
    marketing practices relative to gifts given and other
    expenditures made to doctors and other healthcare professionals.
    In addition to impacting our marketing and educational programs,
    internal business processes will be affected by the numerous
    legal requirements and regulatory guidance at the state, federal
    and industry levels.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    If our operations are found to be in violation of any of the
    laws described above or other applicable state and federal fraud
    and abuse laws, we, as well as our employees, may be subject to
    penalties, including civil and criminal penalties, damages,
    fines, exclusion from government healthcare programs, and the
    curtailment or restructuring of our operations. Individual
    employees may need to defend such suits on behalf of us or
    themselves, which could lead to significant disruption in our
    present and future operations. We cannot assure you that we will
    be able to comply with the above laws and regulations.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">European
    Medical Device Regulation</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The European Union has adopted directives and numerous standards
    that govern and harmonize the national laws and standards
    regulating the design, manufacture, clinical trials, labeling,
    adverse event reporting and post-market surveillance activities
    for medical devices that are marketed in member states.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Compliance with voluntary harmonized standards including ISO
    13845 issued by the International Organization for Standards
    establishes the presumption of conformity with the essential
    requirements for a CE Mark. The International Organization for
    Standardization, or ISO, is a worldwide federation of national
    standards bodies from some 130 countries, established in 1947.
    The mission of the ISO is to promote the development of
    standardization and related activities in the world with a view
    to facilitating the international exchange of goods and
    services. ISO certification is commonly a pre-requisite to use
    of the CE Mark and indicates that a quality system complies with
    standards applicable to activities ranging from initial product
    design and development through production and distribution.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Devices that comply with the requirements of a relevant
    directive will be entitled to bear the CE Mark and, accordingly,
    can be commercially distributed throughout the member states of
    the European Union, and other
</DIV>
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    <BR>
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    countries that comply with or have adopted these directives. The
    method of assessing conformity varies depending on the type and
    class of the product, but typically involves a combination of
    self-assessment by the manufacturer and a third-party assessment
    by a &#147;Notified Body,&#148; an independent and neutral
    institution appointed to conduct conformity assessment. This
    third-party assessment consists of an audit of the
    manufacturer&#146;s quality system and technical review of the
    manufacturer&#146;s product. An assessment by a Notified Body
    residing within the European Union is required in order for a
    manufacturer to commercially distribute the product throughout
    the European Union. The manufacturer&#146;s assessment will
    include a clinical evaluation of the conformity of the device
    with applicable regulatory requirements, which for our eSVS MESH
    will include clinical study results. The clinical data presented
    by us must provide evidence that the products meet the
    performance specifications claimed by us, provide sufficient
    evidence of adequate assessment of unwanted side effects and
    demonstrate that the benefits to the patient outweigh the risks
    associated with the device. We are subject to continued
    surveillance by the Notified Body and are required to report any
    serious adverse incidents to the appropriate authorities of the
    European Union member states.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Medical Devices Directive, or MDD, covers the regulatory
    requirements of the European Union for medical devices.
    Compliance with the requirements of the MDD is declared by
    placing the CE Mark on the product and supplying the device with
    a declaration of conformity, in which the manufacturer certifies
    that its product complies with the MDD.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Products intended for sale must bear the CE mark to show
    compliance with the MDD. If a Notified Body is involved in the
    approval, the number of the Notified Body must also appear
    adjacent to the CE Mark.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The routes to compliance under the MDD depend on the
    classification of the product:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Class&#160;I devices </I>are low risk, such as stethoscopes,
    hospital beds and wheelchairs. The manufacturer must produce a
    technical file, including product test results compared to
    relevant standards. In addition, manufacturers of sterile
    products and devices with a measuring function must apply to a
    Notified Body for certification of the aspects of manufacture
    relating to sterility or measurement.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Class&#160;IIa devices </I>are low to medium risk, such as
    hearing aids, electrocardiographs and ultrasonic diagnostic
    equipment. As with Class&#160;I devices, the manufacturer
    produces a technical file, but a conformity assessment must be
    carried out by a Notified Body, according to one of the
    following routes, at the manufacturer&#146;s option:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    examination and testing of each product or homogenous batch of
    products;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    audit of the full quality assurance system;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    audit of the production quality assurance system;&#160;or
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    audit of final inspection and testing.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Class&#160;IIb devices </I>are medium-high risk devices, such
    as surgical lasers, infusion pumps, ventilators, intensive care
    monitoring equipment and many implantable devices. Routes to
    compliance are the same as for Class&#160;IIa devices, with the
    addition of required examination and testing of the product by
    the Notified Body; however, the full quality assurance route
    does not require type examination and testing.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Class&#160;III devices </I>are high risk, such as balloon
    catheters and prosthetic heart valves. Our eSVS MESH is
    classified as a Class&#160;III device. Routes to compliance are:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    audit of the full quality assurance system and examination of a
    design dossier by the Notified Body. A design dossier is a
    submission similar to a PMA application with the FDA;&#160;or
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    examination and testing of the product, together with audit of
    the production quality assurance system.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We are seeking approval to apply the CE Mark to our eSVS MESH in
    order to market our eSVS MESH in the European Union and other
    countries that accept the CE Mark.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">Third
    Party Reimbursement</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The availability of insurance coverage and reimbursement for
    newly approved medical devices is variable. The commercial
    success of our eSVS MESH in both domestic and international
    markets will be substantially dependent
</DIV>
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    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">54</FONT></I>
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    on whether third-party coverage and reimbursement is available
    for patients receiving bypass grafts with our eSVS MESH.
    Medicare, Medicaid, health maintenance organizations and other
    third-party payors are increasingly attempting to contain
    healthcare costs by limiting both coverage and the level of
    reimbursement of new medical devices, and, as a result, they may
    not cover or provide additional payment for our eSVS MESH. In
    order to position our device for coverage by third-party payors,
    we may have to agree to a lower net sales price than we might
    otherwise charge. The continuing efforts of governmental and
    commercial third-party payors to contain or reduce the costs of
    healthcare may limit our revenue.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In many countries including the United States, third-party
    payors consist of both government funded insurance programs and
    private insurance programs who cover a significant portion of a
    patient&#146;s medical expenses. The trends toward managed
    healthcare in the U.S., and proposed legislation intended to
    reduce the cost of government insurance programs, could
    significantly influence the purchase of healthcare services and
    products, and may result in lower prices for our eSVS MESH or
    the exclusion of our eSVS MESH from reimbursement programs. Even
    before reimbursement may be obtained for our eSVS MESH in the
    United States, FDA approval will be required.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In the United States, CMS is the government entity responsible
    for oversight of the Medicare program. Medicare establishes
    coverage and reimbursement policies at a federal and local level
    for medical products and procedures, and such policies are
    periodically reviewed and updated. While private payors vary in
    their coverage and payment policies, the Medicare program is
    viewed as a benchmark.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    There are established codes for CABG procedures and products
    that are payable for both Medicare and commercial payors. There
    are no assurances that our eSVS MESH technology would fall under
    existing policies or reimbursement codes. There are also no
    assurances that existing payment rates for such reimbursement
    codes will continue to hold at the current levels, such as if
    regulatory changes are implemented regarding the methodology for
    calculating hospital payments for current inpatient procedures.
    Medicare payment rates have decreased approximately 10% to 14%
    for those procedures using drug eluting stents. The reductions
    are being transitioned over a three-year period that began in
    fiscal year 2007. In 2007, CMS also implemented a revised
    payment methodology that more accurately reflects the severity
    of the patient&#146;s condition.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In the United States, governmental and private sector payors
    have instituted initiatives to limit the growth of healthcare
    costs, using, for example, price regulation or controls and
    competitive pricing programs. Some third-party payors require
    pre-approval of coverage for new or innovative devices or
    therapies before they will reimburse healthcare providers who
    use such devices or therapies.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Providers have also sought ways to manage costs, such as through
    the use of group purchasing organizations. It is our belief that
    the planned economic benefits provided by our eSVS MESH to
    physicians and hospitals through lower revascularization costs
    (PCI <FONT style="white-space: nowrap">and/or</FONT>
    CABG) will be viewed by providers and third-party payors as
    cost-effective. However, there remains uncertainty whether our
    eSVS MESH will be viewed positively in a cost-avoidance model so
    as to warrant adequate coverage and reimbursement levels.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Medicare reimburses hospital inpatient stays under the Medicare
    Severity Diagnosis-Related Group (MS-DRG) system. The MS-DRG
    system assigns individual cases to an MS-DRG according to the
    patient&#146;s diagnoses, the procedures performed, and the
    severity of a patient&#146;s condition as identified by the
    presence or absence of complications and comorbidities, or CCs,
    or major CCs, or MCCs. MS-DRGs provide a single bundled payment
    which serves as reimbursement for all items and services
    provided to the Medicare beneficiary during a single
    hospitalization.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Additionally, a relative weight is calculated for each
    individual MS-DRG, which represents the average resources
    required to care for cases within a particular MS-DRG relative
    to the average resources required to treat cases in all MS-DRGs.
    Generally, MS-DRG relative weights are adjusted annually to
    reflect changes in medical practice in a budget neutral manner.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    CMS has made no decisions with respect to MS-DRG assignment for
    patients who undergo CABG procedures in which our eSVS MESH
    would be used, and there can be no assurance that the MS-DRG to
    which such patients will be assigned will result in Medicare
    payment levels that are considered by hospitals to be adequate
    to further support purchase of our eSVS MESH.
</DIV>
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    <BR>
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Under current CMS reimbursement policies, the agency offers a
    process to obtain add-on payment for a new medical technology
    when the existing MS-DRG prospective payment rate is inadequate.
    To obtain add-on payment, a technology must be considered
    &#147;new,&#148; demonstrate substantial improvement above the
    current standard of care and exceed certain payment thresholds.
    Add-on payments are made for no less than two years and no more
    than three years. We must demonstrate the safety and
    effectiveness of our eSVS MESH to the FDA in addition to the CMS
    requirements listed above before add-on payments will be
    approved.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    For reporting of physician services, the American Medical
    Association, or AMA, has developed a coding system known as
    Current Procedural Terminology, or CPT. CPT codes are
    established by the AMA and statutorily adopted by all government
    and commercial payors to describe and develop payment amounts
    for physician services. Physician services are reimbursed by
    Medicare based on a physician fee schedule whereby payment is
    based generally on the number of &#147;relative value
    units&#148; assigned by the AMA to each CPT code. No decision
    has been made concerning whether existing CPT codes would be
    appropriate for use in coding CABG procedures when our eSVS MESH
    is used or if separate, new CPT codes are required. We cannot
    assure you that codes used for submitting claims for CABG
    procedures using our eSVS MESH will result in incremental
    payment to physicians. Failure by physicians to receive what
    they consider to be adequate reimbursement for CABG procedures
    in which our eSVS MESH is used could have a material adverse
    effect on our business, financial condition and results of
    operations.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Outside of the United States, there are many reimbursement
    programs through private payors as well as government programs.
    In some countries, government reimbursement is the predominant
    program available to patients and hospitals. While the majority
    of countries have existing reimbursement for CABG procedures and
    products, a number of countries may require us to gather
    additional clinical data before recognizing coverage and
    reimbursement for our eSVS MESH. It is our intent to complete
    the requisite clinical trials and obtain coverage and
    reimbursement approval in countries where it makes economic
    sense to do so.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Post-FDA approval in the United States, we intend to pursue an
    application for a hospital inpatient New Technology Add-On
    Payment. This will allow facilities to be paid an additional
    amount to account for the cost of our eSVS MESH device on top of
    the MS-DRG for the CABG procedure. Should the clinical trial
    results continue to prove a lowering of revascularization rates,
    we believe there is a reasonable chance that CMS will grant our
    request.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Legal
    Proceedings</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We are not a party to any pending or threatened litigation.
</DIV>

<DIV style="margin-top: 9pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Scientific
    Advisory Board</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our Scientific Advisory Board is currently comprised of the
    following five practicing cardiac surgeons and one practicing
    cardiologist, who provide feedback on disease states, product
    concepts, product requirements, and preclinical/clinical trial
    designs.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>William Cohn,&#160;M.D.</I>: Dr.&#160;Cohn is the Director of
    Minimally Invasive Surgical technology at the Texas Heart
    Institute. His specialties include adult cardiac surgery,
    minimally invasive cardiac surgery, off-pump coronary artery
    bypass surgery, and minimally invasive valve surgery. He has
    been involved with the development of numerous products,
    including many products for minimally invasive cardiac surgery.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Robert Emery,&#160;M.D.</I>: Dr.&#160;Emery has been a
    cardiovascular and thoracic surgeon for more than 25&#160;years
    and is presently a senior partner of Cardiac Surgical
    Associates, P.A. with practices at St. Josephs Hospital in St.
    Paul, Minnesota, where he is Medical Director of Cardiovascular
    Surgery. Dr.&#160;Emery has contributed more than 175 articles
    and 140 scientific abstracts to medical literature and has
    lectured in many parts of the United States and around the
    world. He is active in several professional societies, including
    the American College of Chest Physicians, The Society of
    Thoracic Surgeons, and is the past president of the
    International Society for Minimally Invasive Cardiac Surgery.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Richard Gray,&#160;M.D.</I>: Dr.&#160;Gray has been a
    cardiologist since 1975. He is currently a Medical Director with
    Tyler Heart Institute at Community Hospital of Monterey
    Peninsula, California. His specialties include valvular heart
    disease, artificial heart valves, coronary artery disease, and
    preventive cardiology. Dr.&#160;Gray has been a cardiologist
</DIV>
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    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">56</FONT></I>
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    with California Pacific Medical Center in San&#160;Francisco,
    California, Director of Cardiovascular Services for
    HealthPartners Medical Group, Minneapolis, Minnesota, Chief of
    Cardiology for Regions Hospital, St. Paul, Minnesota, Chairman
    of the University of North Dakota School of Medicine Department
    of Medicine, Director, Surgical Cardiology, Division of
    Cardiology for Cedars-Sinai Medical Center, Los Angeles,
    California, and Medical Director, Heart Transplant Program at
    Cedars-Sinai Medical Center, Los Angeles, California. He has
    also acted as principal investigator on several cardiac research
    programs over his career.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Stuart Jamieson,&#160;M.D.</I>: Dr.&#160;Jamieson is the
    Endowed Chair, Distinguished Professor of Surgery and Chief of
    the Division of Cardiothoracic Surgery for the University of
    California, San&#160;Diego School of Medicine. He is also
    Director of the California Heart and Lung Institute. He is known
    throughout the world for his pioneering research and innovative
    surgical therapy. Internationally recognized for his expertise
    in pulmonary thromboendarterectomy, or PTE, he has performed
    more of these specialized operations than all other surgeons in
    the world combined. He is also well known for his skill in both
    adult and pediatric cardiac surgery. The longest surviving
    heart-lung and double lung transplanted patients in the world
    are patients of Dr.&#160;Jamieson.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Uwe Klima,&#160;M.D.</I>: Dr. Klima is Chief of
    Cardiothoracic Surgery at the American Hospital in Dubai, UAE.
    Prior to his current position, he was Professor of Surgery for
    Singapore National University Hospital&#146;s Department of
    Cardiac, Thoracic and Vascular Surgery and Associate Professor
    of Surgery at Hanover Medical School. He started his training in
    cardiothoracic surgery in Austria. He completed residencies at
    Harvard Medical School and Vienna General Hospital. His
    specialties include adult cardiac surgery, general thoracic
    surgery, minimally invasive surgery, beating heart surgery, and
    peripheral vascular surgery. Dr.&#160;Klima is also the author
    or co-author of over 300 publications.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Theo Kofidis, MD, Ph.D, FAHA</I>: Dr.&#160;Kofidis is the
    Associate Professor of Surgery for National University Hospital
    in Singapore. He is also Director of the Robotic Surgery Program
    for National University Hospital. His specialties include adult
    cardiac surgery, transplantation, heart failure surgery, cardiac
    assist devices, minimally invasive cardiac surgery, and
    arrhythmia surgery. He has been recipient of many professional
    honors, holds several patents, and has been author/co-author on
    nearly 100 papers and books in the field of cardiothoracic
    surgery.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our Scientific Advisory Board members have each received
    nonqualified stock options to purchase 50,000&#160;shares of our
    common stock, which generally vest 25% at grant and 25% each
    year over the subsequent three years on the anniversary of the
    grant date.
</DIV>
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    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">57</FONT></I>
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<A name='111'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Management</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 9pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The name, age and position of each of our directors and
    executive officers as of March&#160;1, 2010, and the names of
    certain persons who have agreed to serve as directors upon the
    closing of the offering are as follows:
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Executive
    Officers and Directors</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
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    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=quadleft -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=maindata -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=quadright -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="53%">&nbsp;</TD>	<!-- colindex=03 type=maindata -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="7" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Name</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Age</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Position</B>
</DIV>
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Manny Villafa&#241;a
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    69
</TD>
<TD>&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    Chairman of the Board and Chief Executive Officer
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Michael P. Winegar
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    49
</TD>
<TD>&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    Chief Operating Officer, Vice President of Regulatory Affairs,
    and Prospective Director
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Scott Kellen
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    44
</TD>
<TD>&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    Chief Financial Officer, Vice President of Finance, and Secretary
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Arch C. Smith(1)(2)(3)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    55
</TD>
<TD>&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    Prospective Director
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Robert E. Munzenrider(1)(2)(3)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    65
</TD>
<TD>&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    Prospective Director
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Robert J. Sheehy(1)(2)(3)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    52
</TD>
<TD>&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    Prospective Director
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="7" valign="top">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>    (1)&#160;
</TD>
    <TD align="left">    Prospective member of our compensation committee.
    Mr.&#160;Sheehy has agreed to serve as the chairman of the
    committee upon his appointment to the board.
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>    (2)&#160;
</TD>
    <TD align="left">    Prospective member of our nominating and governance committee.
    Mr.&#160;Munzenrider has agreed to serve as the chairman of the
    committee upon his appointment to the board.
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>    (3)&#160;
</TD>
    <TD align="left">    Prospective member of our audit committee. Mr.&#160;Munzenrider
    has agreed to serve as the chairman of the committee upon his
    appointment to the board.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Manny Villafa&#241;a </I>is our founder, and has been our
    Chairman of the Board and Chief Executive Officer since our
    inception in 2007. Prior to founding us and since 1999,
    Mr.&#160;Villafa&#241;a founded and served as Chairman of the
    Board and Chief Executive Officer of CABG Medical, Inc., formed
    to develop an artificial coronary graft for use in bypass
    surgery. From 1987 to 2004, Mr.&#160;Villafa&#241;a founded and
    served as Chairman of the Board and Chief Executive Officer of
    ATS Medical, Inc., which developed the latest generation of
    open-pivot mechanical heart valves. From 1976 to 1982,
    Mr.&#160;Villafa&#241;a founded and served as President and
    Chairman of the Board of St. Jude Medical, Inc., leading the
    company&#146;s development of a novel heart valve that still
    dominates the mechanical valve replacement market. From 1972 to
    1976, Mr.&#160;Villafa&#241;a founded and served as President
    and Chairman of the Board of Cardiac Pacemakers, Inc., or CPI, a
    cardiac rhythm management company that introduced a long life
    lithium iodine pacemaker that became and continues to be the
    standard of care in the pacemaker market. CPI was ultimately
    acquired by Eli Lilly and Company, which spun out CPI as Guidant
    Corporation. Guidant was, in turn, purchased by Boston
    Scientific Corporation.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Mr.&#160;Villafa&#241;a has received numerous awards and honors,
    including the &#147;Living Legend of Medicine&#148; award from
    the International Society of Cardio Thoracic Surgeons, the Ellis
    Island Medal of Honor, the Grand Prize
    Recipient&#151;Mediterranean Institute of Cardiology, the
    Ernst&#160;&#038; Young LLP National Master Entrepreneur of the
    Year, the Top 100 Hispanics in the USA, the Boys and Girls Club
    of America Hall of Fame, and induction into the Minnesota
    Business Hall of Fame. We believe that
    Mr.&#160;Villafa&#241;a&#146;s nearly 40&#160;years of
    experience in healthcare, his proven and respected leadership,
    and his deep commitment to us as our founder will be valuable in
    helping to guide us in the years ahead.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Michael P. Winegar </I>joined us as Chief Operating Officer
    and Vice President of Regulatory Affairs in September 2007. From
    2006 to September 2007, Mr.&#160;Winegar was the Vice President
    of Regulatory&#160;and Quality at Enpath Medical, Inc., up to
    and through the company&#146;s acquisition by Greatbatch, Inc.
    While at Enpath, Mr.&#160;Winegar oversaw the regulatory and
    quality functions of various Class&#160;II and&#160;III devices
    and coordinated relevant functions for facility consolidations.
    From 2001 to 2005, Mr.&#160;Winegar was a founding employee of
    ev3 Inc., holding various management positions in the Regulatory
    Affairs, Clinical Research, and Quality Assurance departments.
    From 2000 to 2001, Mr.&#160;Winegar was the Vice President of
    Regulatory Affairs, Clinical Research, and Quality Assurance for
    Myocor, Inc., where he oversaw the first chronic implants of
    Myocor heart failure therapy technologies.
</DIV>
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    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">58</FONT></I>
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Mr.&#160;Winegar began his career with positions at Medical
    Incorporated, Medtronic, Inc., SciMed Life Systems Inc., and
    Boston Scientific Corporation. Mr.&#160;Winegar has also acted
    as a medical device industry consultant in the areas of
    regulatory affairs, quality assurance, and clinical research.
    Mr.&#160;Winegar has agreed to join our board of directors upon
    the closing of this offering. We believe that
    Mr.&#160;Winegar&#146;s experience in the regulatory affairs and
    clinical research fields, coupled with his knowledge of our eSVS
    MESH technology, will bring valuable insight to our board.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Scott Kellen </I>joined us as Chief Financial Officer, Vice
    President of Finance, and Secretary in February 2010. From 2007
    to 2009, Mr.&#160;Kellen served as Director of Finance for
    Transoma Medical, Inc., including during the preparation of its
    proposed initial public offering, which was withdrawn in
    February 2008 due to deteriorated market conditions. From 2005
    to 2007, Mr.&#160;Kellen served as the Corporate Controller for
    ev3 Inc. during the company&#146;s initial public offering and
    during additional follow-on offerings. From 2003 to 2005,
    Mr.&#160;Kellen served as Senior Audit Manager of
    Deloitte&#160;&#038; Touche, LLP (now Deloitte LLP), providing
    auditing and consulting services to mid-size public companies
    after the passage of the Sarbanes-Oxley Act. Altogether,
    Mr.&#160;Kellen has spent more than 12&#160;years in the medical
    device industry, serving early stage and growth companies that
    produced Class&#160;II and&#160;III devices. Mr.&#160;Kellen
    began his career with Deloitte&#160;&#038; Touche in 1987.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Arch C. Smith </I>is currently, and has been since April
    2005, a Venture Partner at Sight Line Partners, a venture
    capital firm focused on investments in later stage private
    medical device companies. From 1984 to 2003, Mr.&#160;Smith
    worked for Piper Jaffray, a Minneapolis-based investment bank.
    Mr.&#160;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.&#160;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.&#160;Smith served on the
    board of directors for CABG Medical, Inc. from 2004 to 2006.
    Mr.&#160;Smith serves on the board of the Minneapolis Heart
    Institute Foundation. Mr.&#160;Smith has agreed to join our
    board of directors upon the closing of this offering. We believe
    that, as a successful venture capitalist, Mr.&#160;Smith will
    bring important strategic insight to our board, as well as a
    wealth of experience working with the investment community.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Robert E. Munzenrider </I>is a retired financial and
    operating executive. From 2000 to 2002, Mr.&#160;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
    <FONT style="white-space: nowrap">e-commerce</FONT>
    service provider, during part of 1999. From 1998 to 1999,
    Mr.&#160;Munzenrider served as Vice President and Chief
    Financial Officer of St. Jude Medical, Inc. Mr.&#160;Munzenrider
    has served on the board of directors for ATS Medical, Inc. since
    2003 and on the board of directors for Viad Corp since 2004.
    Mr.&#160;Munzenrider also served on the board of directors for
    Criticare Systems, Inc. from 2007 to 2008 and the board of
    directors for CABG Medical, Inc. from 2004 to 2006. He is also a
    Trustee Emeritus on the University of Montana Foundation.
    Mr.&#160;Munzenrider has agreed to join our board of directors
    upon the closing of this offering. We believe that
    Mr.&#160;Munzenrider&#146;s significant leadership experience in
    consumer-focused industries will add valuable expertise and
    insight to our board.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Robert J. Sheehy </I>is a retired health insurance industry
    executive. From 2007 to 2008, Mr.&#160;Sheehy served as Senior
    Vice President for UnitedHealth Group, Inc. From 2000 to 2007,
    Mr.&#160;Sheehy served as Chief Executive Officer of
    UnitedHealthcare, Inc., a division of UnitedHealth Group. From
    April 1998 to December 2000, Mr.&#160;Sheehy was President of
    UnitedHealthcare. Prior to April 1998, Mr.&#160;Sheehy served in
    various capacities with UnitedHealth Group. Mr.&#160;Sheehy has
    agreed to join our board of directors upon the closing of this
    offering. We believe that Mr.&#160;Sheehy will bring strategic
    insight and leadership and a wealth of experience in healthcare
    to our board, as well as knowledge of regulations and issues
    facing healthcare providers and medical device companies.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Director
    Independence</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our board of directors has reviewed the materiality of any
    relationship that each of our directors and prospective
    directors has with us, either directly or indirectly. Based on
    this review, our board has determined that the following
    prospective directors will be &#147;independent directors&#148;
    as defined by Rule&#160;5605(a)(2) of the Marketplace
</DIV>
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    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">59</FONT></I>
</DIV><!-- END PAGE WIDTH -->
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Rules of The NASDAQ Stock Market, or NASDAQ, at the time they
    become directors upon the closing of the offering:
    Messrs.&#160;Smith, Munzenrider, and Sheehy.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Committees of the
    Board of Directors</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our board of directors has provided for the establishment of an
    audit committee, a compensation committee and a nominating and
    governance committee effective upon the closing of this
    offering. The composition and function of each of these
    committees is described below.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Audit
    Committee</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our audit committee will be comprised of Mr.&#160;Munzenrider
    (chairman), Mr.&#160;Smith and Mr.&#160;Sheehy. Our board of
    directors has determined that Mr.&#160;Munzenrider is an audit
    committee financial expert, as defined by the rules of the
    Securities and Exchange Commission. Our audit committee will be
    authorized to:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    approve and retain the independent registered public accounting
    firm to conduct the annual audit of our financial statements;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    review the proposed scope and results of the audit;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    review and pre-approve audit and non-audit fees and services;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    review accounting and financial controls with the independent
    auditors and our financial and accounting staff;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    review and approve transactions between us and our directors,
    officers and affiliates;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    recognize and prevent prohibited non-audit services;&#160;and
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    establish procedures for complaints received by us regarding
    accounting matters; oversee internal audit functions, if any.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We believe that the composition of our audit committee will meet
    the independence requirements of the applicable rules of the
    Securities and Exchange Commission and NASDAQ upon completion of
    this offering.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Compensation
    Committee</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Upon the closing of the offering, our compensation committee
    will be comprised of Mr.&#160;Sheehy (chairman),
    Mr.&#160;Munzenrider and Mr.&#160;Smith. All members of the
    compensation committee will qualify as independent under the
    current definition promulgated by NASDAQ. Our compensation
    committee will be authorized to:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    review and recommend the compensation arrangements for
    management;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    establish and review general compensation policies with the
    objective to attract and retain superior talent, to reward
    individual performance and to achieve our financial goals;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    administer our stock incentive and purchase plans;&#160;and
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    oversee the evaluation of the board of directors and management.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Nominating and
    Governance Committee</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Upon the closing of the offering, our nominating and governance
    committee will be comprised of Mr.&#160;Munzenrider (chairman),
    Mr.&#160;Smith and Mr.&#160;Sheehy. All members of the
    nominating and governance committee will qualify as independent
    directors under the current definition promulgated by NASDAQ.
    Our nominating and governance committee will be authorized to:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    identify and nominate candidates for election to the board of
    directors;&#160;and
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    develop and recommend to the board of directors a set of
    corporate governance principles applicable to our company.
</TD>
</TR>

</TABLE>
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    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">60</FONT></I>
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Compensation
    Committee Interlocks and Insider Participation</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    No prospective member of our compensation committee has at any
    time been an employee of ours. None of our executive officers
    serves as a member of the board of directors or compensation
    committee of any other entity that has one or more executive
    officers serving as a member of our board of directors or
    compensation committee.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Code of Business
    Conduct and Ethics</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have adopted a code of business conduct and ethics that
    applies to all of our employees, officers and directors,
    including those officers responsible for financial reporting.
    The code of business conduct and ethics is available on our
    website at www.kipsbaymedical.com. We expect that any amendments
    to the code, or any waivers of its requirements, will be
    disclosed on our website.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Limitation of
    Directors&#146; and Officers&#146; Liability and
    Indemnification</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Delaware General Corporation Law authorizes corporations to
    limit or eliminate, subject to specified conditions, the
    personal liability of directors to corporations and their
    stockholders for monetary damages for breach of their fiduciary
    duties. Our certificate of incorporation and amended and
    restated bylaws limit the liability of our directors to the
    fullest extent permitted by Delaware law.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have obtained director and officer liability insurance to
    cover liabilities our directors and officers may incur in
    connection with their services to us. Our certificate of
    incorporation and amended and restated bylaws also provide that
    we will indemnify and advance expenses to any of our directors
    and officers who, by reason of the fact that he or she is one of
    our officers or directors, is involved in a legal proceeding of
    any nature. We will repay certain expenses incurred by a
    director or officer in connection with any civil, criminal,
    administrative or investigative action or proceeding, including
    actions by us or in our name. Such indemnifiable expenses
    include, to the maximum extent permitted by law, attorney&#146;s
    fees, judgments, fines, settlement amounts and other expenses
    reasonably incurred in connection with legal proceedings. A
    director or officer will not receive indemnification if he or
    she is found not to have acted in good faith and in a manner he
    or she reasonably believed to be in, or not opposed to, our best
    interest.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have entered into agreements to indemnify our directors and
    officers and intend to enter into these agreements in the
    future. These agreements provide that we will, among other
    things, indemnify and advance expenses to our directors and
    officers for certain expenses, including attorneys&#146; fees,
    judgments, fines and settlement amounts incurred by any such
    person in any action or proceeding, including any action by us
    arising out of such person&#146;s services as our director or
    officer, or any other company or enterprise to which the person
    provides services at our request. We believe that these
    provisions and agreements are necessary to attract and retain
    qualified persons as directors and officers.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Such limitation of liability and indemnification does not affect
    the availability of equitable remedies. In addition, we have
    been advised that in the opinion of the Securities and Exchange
    Commission, indemnification for liabilities arising under the
    Securities Act of 1933, as amended, is against public policy as
    expressed in the Securities Act and is therefore unenforceable.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    There is no pending litigation or proceeding involving any of
    our directors, officers, employees or agents in which
    indemnification will be required or permitted. We are not aware
    of any threatened litigation or proceeding that may result in a
    claim for such indemnification.
</DIV>
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    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">61</FONT></I>
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<A name='112'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Director
    Compensation</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Until the closing of this offering, Manny Villafa&#241;a will be
    our sole director and the chairman of our board of directors.
    Mr.&#160;Villafa&#241;a is not compensated for his services as a
    director. Messrs.&#160;Smith, Munzenrider, Sheehy and Winegar
    have agreed to join our board of directors immediately following
    this offering.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Upon the closing of the offering, Messrs.&#160;Smith,
    Munzenrider, and Sheehy, as our non-employee directors, will
    each be paid:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    an annual retainer of $18,000;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    a meeting attendance fee of $1,250 per meeting;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    a committee meeting attendance fee of $1,500 and $1,000 per
    meeting for chairs and members, respectively;&#160;and
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    stipends of $3,000 and $5,000 for the chairmen of the
    compensation and audit committees, respectively.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Upon joining the board, each non-employee director will receive
    30,000&#160;shares of common stock, which will vest in four
    annual increments, beginning with the one-year anniversary of
    the director&#146;s appointment to the board. At this time, we
    do not have a policy regarding annual grants of common stock to
    our non-employee directors.
</DIV>
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    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">62</FONT></I>
</DIV><!-- END PAGE WIDTH -->
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<A name='113'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Executive
    Compensation</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>In light of our limited operating history, small management
    team, and single-member board structure, we have elected not to
    provide a compensation discussion and analysis in this
    prospectus as allowed under the smaller reporting company
    disclosure rules of the SEC applicable to us.</I>
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Overview</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In this section, we describe our compensation programs and
    policies and the material elements of compensation for the year
    ended December&#160;31, 2009 for our Chairman and Chief
    Executive Officer, who also served as our Chief Financial
    Officer in fiscal year 2009, and our Chief Operating Officer and
    Vice President of Regulatory Affairs. We refer to these persons
    as our &#147;named executive officers&#148; elsewhere in this
    prospectus. We did not have any other executive officers in
    fiscal year 2009, and, except for Scott Kellen, who joined us as
    our Chief Financial Officer, Vice President of Finance, and
    Secretary in February 2010, we have not hired any additional
    executive officers to date.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Decisions on the components of our compensation programs are,
    until the closing of this offering, the responsibility of our
    Chief Executive Officer and Chairman. Upon the closing of this
    offering, our compensation committee will be responsible for
    reviewing and evaluating these components, including employee
    base salaries and benefit plans. The compensation committee will
    provide advice and recommendations to the board of directors on
    such matters. See &#147;Committees of the Board of
    Directors&#151;Compensation Committee&#148; for further details
    on the role of the compensation committee.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Employment
    Agreements</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Manny
    Villafa&#241;a</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We entered into an employment agreement with
    Mr.&#160;Villafa&#241;a on July&#160;19, 2007. This agreement
    provided for an initial base salary of $275,000, which was
    increased to $304,500 in 2009. Mr.&#160;Villafa&#241;a may be
    awarded discretionary bonuses as determined by our board of
    directors and is entitled to participate in any employee benefit
    plans we sponsor.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Pursuant to the employment agreement, if we terminate
    Mr.&#160;Villafa&#241;a&#146;s employment without cause, he is
    entitled to his base salary for the entire term of the
    employment agreement, which expires on July&#160;1, 2012. For
    benefits payable upon a change in control, see &#147;Severance
    Benefits and Change in Control Arrangements.&#148;
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The employment agreement also contains provisions relating to
    confidential information, requiring Mr.&#160;Villafa&#241;a to
    refrain from disclosing any of our proprietary information, and
    to assignment of inventions, obligating Mr.&#160;Villafa&#241;a
    to assign to us any inventions which directly concern our eSVS
    MESH or future products, research, or development, or which
    result from work he performs for us or using our facilities.
    Further, Mr.&#160;Villafa&#241;a&#146;s employment agreement
    contains certain provisions concerning his post-employment
    activities. Pursuant to the agreement, he has agreed not to
    compete with us for a period of two years after the termination
    of his employment, provided that we make a monthly payment to
    Mr.&#160;Villafa&#241;a equal to his base salary rate at the
    time of termination, adjusted based upon changes in the consumer
    price index, beginning with the first month after termination of
    employment and continuing until the non-competition provision
    expires. Such two-year non-competition period will automatically
    be extended by one year increments, up to a total of five years,
    unless terminated by us, provided we continue making the monthly
    payments set forth above. Mr.&#160;Villafa&#241;a will also be
    entitled to continue his participation in our medical benefits
    plan for the term of the non-competition provision, provided he
    continues to pay the employee portion of the premium. Following
    the termination of his employment with us,
    Mr.&#160;Villafa&#241;a has also agreed to consult on
    non-confidential matters at the request of our board of
    directors.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Michael P.
    Winegar and Scott Kellen</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We entered into employment agreements with Mr.&#160;Winegar on
    September&#160;1, 2007 and Mr.&#160;Kellen on February&#160;8,
</DIV>
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    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">63</FONT></I>
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    2010. Mr.&#160;Winegar&#146;s employment agreement provided for
    an initial base salary of $175,000, which was increased to
    $210,000 in 2009. Mr.&#160;Kellen&#146;s employment agreement
    provided for an annual base salary of $185,000. As explained
    further in &#147;Overview&#148; above, these compensation
    amounts were determined by our Chief Executive Officer and
    Chairman.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Mr.&#160;Winegar and Mr.&#160;Kellen are both at-will employees.
    Therefore, their employment agreements do not have defined
    terms, and may be terminated by the executive or by us for any
    reason or no reason with ten days prior notice.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Although we may, in our discretion, provide Mr.&#160;Winegar or
    Mr.&#160;Kellen with severance benefits upon termination of his
    employment, neither executive is entitled to severance benefits.
    For benefits payable upon a change in control, see
    &#147;Severance Benefits and Change in Control
    Arrangements.&#148;
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Pursuant to non-competition and non-solicitation provisions of
    their employment agreements, both Mr.&#160;Winegar and
    Mr.&#160;Kellen have agreed not to compete with us for a period
    of one year following termination of their employment. The
    employment agreements also contain provisions relating to
    confidential information and assignment of inventions, which
    require Mr.&#160;Winegar and Mr.&#160;Kellen to refrain from
    disclosing any of our proprietary information and to assign to
    us any inventions which directly concern our eSVS MESH or future
    products, research, or development, or which result from work
    they perform for us or using our facilities.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Base
    Salary</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Base salaries for our named executive officers are established
    based on the executive&#146;s level of responsibility and years
    of experience, taking into account competitive trends. Base
    salaries of all employees, including executive officers, are
    reviewed annually and may be increased for merit reasons or due
    to overall company performance.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Equity
    Awards</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Equity awards to our named executive officers generally consist
    of incentive stock options. For a description of the terms and
    conditions of our stock option plan, see &#147;Employee Benefit
    Plans&#151;2007 Long-Term Incentive Plan.&#148;
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Upon commencement of his employment with us, Mr.&#160;Winegar
    received an incentive stock option to purchase
    50,000&#160;shares of our common stock at an exercise price of
    $1.00 per share. One-quarter of the total number of shares
    subject to the option vested on each of September&#160;1, 2008
    and 2009, and an additional one-quarter of the total number of
    shares will vest on each of September&#160;1, 2010 and 2011. In
    June 2008, January 2009, September 2009, and January 2010,
    Mr.&#160;Winegar received additional incentive stock options to
    purchase 10,000, 30,000, 10,000, and 25,000&#160;shares,
    respectively, of our common stock at exercise prices per share
    of $5.83, $5.83, $6.00, and $7.00, respectively. Each of these
    option grants vests, in the aggregate, as to one-fourth of the
    shares on the first anniversary of the grant date and annually
    thereafter until the fourth anniversary of the grant date.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    There were no options exercised by any of our named executive
    officers during 2009.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Non-Equity
    Incentive Compensation</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We did not award any non-equity incentive compensation to any of
    our named executive officers in 2009.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Retirement Plan
    and Other Benefits</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We offer a SIMPLE IRA plan and health, disability, and life
    insurance to our full-time employees, including our named
    executive officers. For a description of the terms and
    conditions of our SIMPLE IRA plan, see &#147;Employee Benefit
    Plans&#151;Retirement Plan and Other Benefits.&#148;
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Nonqualified
    Deferred Compensation</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    None of our named executive officers participate in or have
    account balances in nonqualified defined contribution plans or
    other deferred compensation plans maintained by us.
</DIV>
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    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">64</FONT></I>
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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    <B><FONT style="font-family: Arial, Helvetica">Perquisites and
    Other Personal Benefits</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We provide Mr.&#160;Winegar with a car allowance of $500 per
    month.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Severance
    Benefits and Change in Control Arrangements</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have agreed to provide the severance benefits and change in
    control arrangements described below to our named executive
    officers.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Manny
    Villafa&#241;a</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Pursuant to his employment agreement, if we terminate
    Mr.&#160;Villafa&#241;a&#146;s employment without cause, he is
    entitled to his base salary for the entire term of the
    agreement. The agreement will expire on July&#160;1, 2012.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Pursuant to the agreement, Mr.&#160;Villafa&#241;a has agreed
    not to compete with us for a period of two years after the
    termination of his employment, subject to extension by us for
    three additional years, provided that we make a monthly payment
    to Mr.&#160;Villafa&#241;a equal to his base salary rate at the
    time of termination, adjusted based upon changes in the consumer
    price index, beginning with the first month after termination of
    employment and continuing until the non-competition provision
    expires. Mr.&#160;Villafa&#241;a will also be entitled to
    continue his participation in our medical benefits plan,
    provided he continues to pay the employee portion of the
    premium. Such benefits will continue until the expiration of the
    non-competition provision, which, as discussed in
    &#147;Employment Agreements&#148; above, will be a period of not
    less than two years and not more than five years.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We also entered into a change in control agreement with
    Mr.&#160;Villafa&#241;a on September&#160;12, 2008. Under the
    terms of this agreement, if, within 24&#160;months of a change
    in control, Mr.&#160;Villafa&#241;a&#146;s employment is
    terminated by us other than for cause, or if he resigns for good
    reason, Mr.&#160;Villafa&#241;a will be entitled to a prorated
    portion of any annual incentive bonus for the fiscal year in
    which the termination occurs and a severance benefit equal to
    three years of his base salary. The change in control agreement
    will expire on September&#160;12, 2011, but will be
    automatically extended by one-year increments thereafter unless
    either party provides written notice to the other of the intent
    not to extend the agreement.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Michael P.
    Winegar and Scott Kellen</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Under the terms of their employment agreements, neither
    Mr.&#160;Winegar nor Mr.&#160;Kellen is entitled to any
    severance benefits upon termination of employment. However, we
    may, in our sole discretion, provide them with severance
    benefits.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We entered into change in control agreements with
    Mr.&#160;Winegar, effective September&#160;12, 2008, and
    Mr.&#160;Kellen, effective February&#160;8, 2010. Under the
    terms of these agreements, if, within 24&#160;months of a change
    in control, either executive is terminated by us for a reason
    other than cause or resigns for good reason, he will be entitled
    to a prorated portion of any annual incentive bonus for the
    fiscal year in which the termination occurs and a severance
    benefit equal to two years of his base salary. The change in
    control agreements expire three years from their effective
    dates, but will be automatically extended by one-year increments
    unless either party provides written notice to the other of the
    intent not to extend the agreement.
</DIV>
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    <BR>
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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    <B><FONT style="font-family: Arial, Helvetica">Summary
    Compensation Table for 2009</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The following table provides information regarding the
    compensation earned during the year ended December&#160;31, 2009
    by our Chairman and Chief Executive Officer, who also served as
    our Chief Financial Officer in fiscal year 2009, and our Chief
    Operating Officer and Vice President of Regulatory Affairs. We
    refer to these persons as our &#147;named executive
    officers&#148; elsewhere in this prospectus. We did not have any
    other executive officers in 2009, and, except for Scott Kellen,
    who joined us as our Chief Financial Officer, Vice President of
    Finance, and Secretary in February 2010, we have not hired any
    additional executive officers to date.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

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    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=06 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="21" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Option<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>All Other<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Salary<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Awards<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Compensation<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Total<BR>
    </B>
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Name and Principal Position</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Year</B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>($)</B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>($)(1)</B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>($)(2)</B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>($)</B>
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Manny Villafa&#241;a
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    2009
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    $
</TD>
<TD nowrap align="right" valign="top">
    304,500
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    $
</TD>
<TD nowrap align="right" valign="top">
    &#151;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    $
</TD>
<TD nowrap align="right" valign="top">
    &#160;&#160;&#160;&#160;&#160;8,901
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    $
</TD>
<TD nowrap align="right" valign="top">
    &#160;&#160;313,401
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="top">
<DIV style="text-indent: 0pt; margin-left: 10pt">
    Chairman and Chief<BR>
    Executive Officer(3)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Michael Winegar
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    2009
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    210,000
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    114,131
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    12,128
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    336,259
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="top">
<DIV style="text-indent: 0pt; margin-left: 10pt">
    Chief Operating Officer<BR>
    and Vice President of Regulatory Affairs
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="21" valign="top">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

<TR>
    <TD width="2%"></TD>
    <TD width="1%"></TD>
    <TD width="97%"></TD>
</TR>

<TR>
    <TD align="right" valign="top">
    (1) </TD>
    <TD></TD>
    <TD valign="bottom">
    The value of each of the option awards was computed in
    accordance with FASB ASC Topic 718 without consideration of
    forfeitures. Valuation assumptions are described in the notes to
    financial statements appearing elsewhere in this prospectus. See
    the table entitled &#147;Outstanding Equity Awards at Fiscal
    Year End&#148; and our discussion of stock-based compensation
    under &#147;Equity Awards.&#148; Each stock option is an
    incentive stock option with a ten-year term, and vests, in the
    aggregate, as to one-fourth of the shares on the first
    anniversary of the grant date and annually thereafter until the
    fourth anniversary of the grant date.</TD>
</TR>


<TR style="line-height: 3pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD align="right" valign="top">
    (2) </TD>
    <TD></TD>
    <TD valign="bottom">
    Represents our match of Mr.&#160;Villafa&#241;a&#146;s and
    Mr.&#160;Winegar&#146;s 2009 contributions to their SIMPLE IRA
    accounts. See our discussion of our SIMPLE IRA plan under
    &#147;Employee Benefit Plans&#151;Retirement Plan and Other
    Benefits. The amount provided for Mr.&#160;Winegar also
    represents the $6,000 car allowance discussed under
    &#147;Perquisites and Other Benefits.&#148;</TD>
</TR>


<TR style="line-height: 3pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD align="right" valign="top">
    (3) </TD>
    <TD></TD>
    <TD valign="bottom">
    In addition to his roles as Chairman and Chief Executive
    Officer, Mr.&#160;Villafa&#241;a also served as Chief Financial
    Officer in fiscal year 2009.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Outstanding
    Equity Awards at December&#160;31, 2009</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The following table sets forth certain information regarding
    outstanding equity awards granted to our named executive
    officers as of December&#160;31, 2009. Since our inception,
    Mr.&#160;Winegar is the only named executive officer who has
    been granted an option award. Each award was granted pursuant to
    our 2007 Long-Term Incentive Plan.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="51%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="5%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="5%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="7%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=05 type=gutter -->
    <TD width="3%" align="right">&nbsp;</TD>	<!-- colindex=05 type=lead -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=05 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=05 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=06 type=gutter -->
    <TD width="5%" align="right">&nbsp;</TD>	<!-- colindex=06 type=lead -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=06 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=06 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="21" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="19" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Option Awards</B>
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Number of<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Number of<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Securities<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Securities<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Underlying<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Underlying<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Unexercised<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Unexercised<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Option<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Option<BR>
    </B>
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Options<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Options<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Exercise<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Expiration<BR>
    </B>
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Name</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Grant Date</B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Exercisable</B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Unexercisable</B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Price</B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Date</B>
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Michael Winegar
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    9/1/2007
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    25,000
</TD>
<TD nowrap align="left" valign="top">
    (1)
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    25,000
</TD>
<TD nowrap align="left" valign="top">
    (1)
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    $
</TD>
<TD nowrap align="right" valign="top">
    1.00
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    9/1/2017
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    6/1/2008
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    2,500
</TD>
<TD nowrap align="left" valign="top">
    (2)
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    7,500
</TD>
<TD nowrap align="left" valign="top">
    (2)
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    5.83
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    6/1/2018
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    1/1/2009
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    7,500
</TD>
<TD nowrap align="left" valign="top">
    (3)
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    22,500
</TD>
<TD nowrap align="left" valign="top">
    (3)
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    5.83
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    1/1/2019
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    9/4/2009
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    &#151;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10,000
</TD>
<TD nowrap align="left" valign="top">
    (4)
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    6.00
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    9/4/2019
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="21" valign="top">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

<TR>
    <TD width="2%"></TD>
    <TD width="1%"></TD>
    <TD width="97%"></TD>
</TR>

<TR>
    <TD align="right" valign="top">
    (1) </TD>
    <TD></TD>
    <TD valign="bottom">
    Represents shares granted pursuant to an incentive stock option
    agreement for an aggregate of 50,000&#160;shares of our common
    stock. This option vests in four annual installments beginning
    on September&#160;1, 2008.</TD>
</TR>


<TR style="line-height: 3pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD align="right" valign="top">
    (2) </TD>
    <TD></TD>
    <TD valign="bottom">
    Represents shares granted pursuant to an incentive stock option
    agreement for an aggregate of 10,000&#160;shares of our common
    stock. This option vests in four annual installments beginning
    on June&#160;1, 2009.</TD>
</TR>

</TABLE>
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<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">66</FONT></I>
</DIV><!-- END PAGE WIDTH -->
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

<TR>
    <TD width="2%"></TD>
    <TD width="1%"></TD>
    <TD width="97%"></TD>
</TR>

<TR>
    <TD align="right" valign="top">
    (3) </TD>
    <TD></TD>
    <TD valign="bottom">
    Represents shares granted pursuant to an incentive stock option
    agreement for an aggregate of 30,000&#160;shares of our common
    stock. This option vests in four annual installments beginning
    on January&#160;1, 2010.</TD>
</TR>


<TR style="line-height: 3pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD align="right" valign="top">
    (4) </TD>
    <TD></TD>
    <TD valign="bottom">
    Represents shares granted pursuant to an incentive stock option
    agreement for an aggregate of 10,000&#160;shares. This option
    vests in four annual installments beginning on September&#160;4,
    2010.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Employee Benefit
    Plans</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">2007 Long-Term
    Incentive Plan</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our 2007 Long-Term Incentive Plan, or the 2007 Plan, was adopted
    by our board of directors and approved by our stockholders on
    July&#160;27, 2007. The 2007 Plan will expire in July 2017,
    unless sooner terminated by our board of directors.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <I><FONT style="font-family: Arial, Helvetica">Stock
    Awards</FONT></I>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Under the 2007 Plan, we may grant incentive stock options,
    nonqualified stock options, restricted stock awards, stock
    appreciation rights, and other performance awards to our
    officers, directors, employees, consultants, and advisors.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <I><FONT style="font-family: Arial, Helvetica">Administration</FONT></I>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The 2007 Plan is administered by our board of directors and our
    compensation committee, collectively referred to as the plan
    administrator, which has the authority to grant awards,
    determine award recipients, dates of grant, the numbers and
    types of stock awards to be granted and to set the terms of
    these awards, including the exercise price, vesting periods and
    the period of exercisability.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <I><FONT style="font-family: Arial, Helvetica">Share
    Reserve</FONT></I>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    As of December&#160;31, 2009, there were 1,999,000&#160;shares
    of our common stock reserved, but only 1,401,000&#160;shares of
    our common stock available for issuance under the 2007 Plan. As
    of December&#160;31, 2009, there were outstanding options to
    purchase 598,000&#160;shares of our common stock under the 2007
    Plan. Options for an additional 185,000&#160;shares of our
    common stock were granted in 2010 and were outstanding as of
    March&#160;1, 2010. Accordingly, as of March&#160;1, 2010, there
    were outstanding options to purchase an aggregate of
    783,000&#160;shares of our common stock under the 2007 Plan and
    1,216,000&#160;shares of our common stock available for future
    grant. The maximum number of shares that may be issued pursuant
    to the exercise of incentive stock options under the 2007 Plan
    is equal to 2,000,000&#160;shares.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    If a stock award granted under the 2007 Plan expires or
    otherwise terminates without being exercised in full, or is
    settled in cash, the shares of common stock not acquired
    pursuant to the stock award again become available for
    subsequent issuance under our 2007 Plan. In addition, the
    following types of shares under the 2007 Plan may become
    available for the grant of new stock awards under the 2007 Plan:
    (a)&#160;shares that are forfeited prior to becoming fully
    vested; (b)&#160;shares withheld to satisfy income or employment
    withholding taxes; (c)&#160;shares used to pay the exercise
    price of an option in a net share settlement; and
    (d)&#160;shares tendered to us to pay the exercise price of an
    option. Shares issued under the 2007 Plan may be previously
    unissued shares or reacquired shares bought on the open market.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <I><FONT style="font-family: Arial, Helvetica">Stock
    Options</FONT></I>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Incentive and nonqualified stock options are granted pursuant to
    incentive and nonqualified stock option agreements adopted by
    the plan administrator. The plan administrator determines the
    exercise price for a stock option, within the terms and
    conditions of the 2007 Plan, provided that the exercise price of
    an incentive stock option cannot be less than 100% of the fair
    market value of our common stock on the date of grant. Options
    granted under our 2007 Plan vest at the rate specified by the
    plan administrator.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The plan administrator determines the term of stock options
    granted under our 2007 Plan. Incentive stock options may be
    granted for terms up to a maximum of 10&#160;years, except in
    the case of certain incentive stock options, as described below.
    Stock options generally are not transferable except by will, or
    the laws of descent and distribution unless, in the case of
    nonqualified stock options, permitted by the plan administrator.
</DIV>
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    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">67</FONT></I>
</DIV><!-- END PAGE WIDTH -->
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Acceptable consideration for the purchase of common stock issued
    upon the exercise of a stock option will be determined by the
    plan administrator and may include (a)&#160;cash, personal check
    or certified check or (b)&#160;the tender of common stock
    previously owned by the optionholder.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <I><FONT style="font-family: Arial, Helvetica">Limitations on
    Incentive Stock Options</FONT></I>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    No incentive stock option may be granted to any person who, at
    the time of the grant, owns or is deemed to own stock possessing
    more than 10% of our total combined voting power or that of any
    of our affiliates unless (a)&#160;the option exercise price is
    at least 110% of the fair market value of the stock subject to
    the option on the date of grant and (b)&#160;the term of the
    incentive stock option does not exceed five years from the date
    of grant.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <I><FONT style="font-family: Arial, Helvetica">Restricted Stock
    Awards</FONT></I>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Restricted stock awards are granted pursuant to restricted stock
    agreements adopted by the plan administrator. Shares of common
    stock acquired under a restricted stock award may, but need not,
    be subject to a risk of forfeiture in our favor in accordance
    with a vesting schedule to be determined by the plan
    administrator. No restricted stock award may be transferred,
    other than by will or the laws of descent and distribution,
    prior to the date any risks of forfeiture described in the
    restricted stock agreement have lapsed.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <I><FONT style="font-family: Arial, Helvetica">Stock
    Appreciation Rights</FONT></I>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Stock appreciation rights are granted pursuant to stock
    appreciation right agreements adopted by the plan administrator.
    The plan administrator determines the strike price for a stock
    appreciation right which, unless otherwise determined by the
    plan administrator, cannot be less than 100% of the fair market
    value of our common stock on the date of grant. Upon the
    exercise of a stock appreciation right, we will pay the
    participant an amount equal to the product of (a)&#160;the
    excess of the per share fair market value of our common stock on
    the date of exercise over the strike price, multiplied by
    (b)&#160;the number of shares of common stock with respect to
    which the stock appreciation right is exercised. A stock
    appreciation right granted under the 2007 Plan vests at the rate
    specified in the stock appreciation right agreement as
    determined by the plan administrator.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <I><FONT style="font-family: Arial, Helvetica">Performance
    Awards</FONT></I>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The 2007 Plan permits the grant of performance unit awards that
    shall consist of monetary awards that may be earned if the
    company or award recipient achieves certain performance
    objectives established by the plan administrator over a
    specified performance periods and performance share awards shat
    consist of shares of our common stock that may be earned or
    become vested in whole or in part if the Company or award
    recipient achieves certain performance objectives established by
    the plan administrator over a specified performance period.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <I><FONT style="font-family: Arial, Helvetica">Changes to
    Capital Structure</FONT></I>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In the event that there is a specified type of change in our
    capital structure, such as a stock split, appropriate
    adjustments may be made to (a)&#160;the number of shares
    reserved under the 2007 Plan and (b)&#160;the number of shares
    and exercise price or strike price, if applicable, of all
    outstanding stock awards.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <I><FONT style="font-family: Arial, Helvetica">Effect on Stock
    Awards of Certain Corporate Transactions</FONT></I>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In the event of the acquisition of the Company through the sale
    of substantially all of the Company&#146;s assets and the
    consequent discontinuance of its business or through a merger,
    consolidation, exchange, reorganization, reclassification,
    extraordinary dividend, divestiture, liquidation,
    recapitalization, stock split, stock dividend or otherwise,
    certain significant corporate transactions, our board of
    directors has the discretion to:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    accelerate the vesting of a stock or performance award;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    arrange for the lapse of any reacquisition or repurchase rights
    held by us with respect to the stock award;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    cancel or arrange for the cancellation of the stock award, to
    the extent not vested or exercised prior to the effective time
    of the corporate transaction;
</TD>
</TR>

</TABLE>
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<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">68</FONT></I>
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    provide for the surrender of a stock award in exchange for a
    payment equal to the excess of (a)&#160;the value of the
    property that the award holder would have received upon the
    exercise of the stock award over (b)&#160;the exercise price
    otherwise payable in connection with the stock award;&#160;or
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    arrange for the assumption, continuation or substitution of a
    stock award by a surviving or acquiring entity or parent company.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Retirement
    Plan and Other Benefits</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We sponsor a SIMPLE IRA retirement plan, which covers
    substantially all qualified full-time employees. This plan
    provides that each employee may elect to contribute to an
    individual retirement plan through salary reduction
    contributions. We currently match each employee&#146;s
    contribution to the plan up to 3% of the employee&#146;s base
    annual wage. We also offer health, disability, and life
    insurance to our full-time employees.
</DIV>
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<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">69</FONT></I>
</DIV><!-- END PAGE WIDTH -->
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<A name='114'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Certain
    Relationships and Related Party Transactions</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The following is a summary of transactions since our inception
    to which we have been a party in which the amount involved
    exceeded $25,960, which is equal to 1% of the average of our
    total assets at December&#160;31, 2008 and 2009, and in which
    any of our directors, executive officers or beneficial holders
    of more than 5% of our capital stock had or will have a direct
    or indirect material interest, other than compensation
    arrangements that are described under the section of this
    prospectus entitled &#147;Compensation Discussion and
    Analysis.&#148;
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Equity Issuances
    to Directors, Executive Officers and 5% Stockholders</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The following table shows all issuances of common stock during
    the past two fiscal years to each of our directors, executive
    officers and holders of more than 5% of our capital stock.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="65%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="6%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="7%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="12" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Aggregate<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Date of<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Number of<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Purchase<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Issuance</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Shares</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Price</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <B><I>Directors and Executive Officers</I></B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Manny Villafa&#241;a
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    7/18/2007
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    5,400,000
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
    $
</TD>
<TD nowrap align="right" valign="top">
    90,000
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Michael Winegar
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    7/18/2007
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    300,000
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    5,000
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <B><I>5% Stockholders</I></B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Kips Bay Investments, LLC
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    5/21/2008
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    60,000
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    350,000
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    7/21/2008
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    60,000
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    350,000
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    9/3/2008
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    60,000
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    350,000
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10/15/2008
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    60,000
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    350,000
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    12/1/2008
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    60,000
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    350,000
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    1/12/2009
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    60,000
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    350,000
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    3/2/2009
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    4,800,000
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    3,000,000
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    3/2/2009
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    347,389
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    217,188
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    3/5/2009
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    60,000
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    350,000
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    4/17/2009
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    60,000
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    350,000
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    6/18/2009
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    120,000
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    700,000
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    6/30/2009
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    41,667
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    250,000
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    2/16/2010
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    600,000
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    3,500,000
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    2/16/2010
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    400,000
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    250,000
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="13" valign="top">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Agreements with
    Directors and Executive Officers</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Please see &#147;Executive Compensation&#148; for information
    regarding the employment agreements with, and compensation of,
    our executive officers.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have entered into indemnification agreements with our
    directors and executive officers. See
    &#147;Management&#151;Limitation of Directors&#146; and
    Officers&#146; Liability and Indemnification.&#148;
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Agreements with
    5% Stockholders</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Investment
    Agreement with Kips Bay Investments, LLC</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On July&#160;19, 2007, we executed an Investment Agreement and
    two secured convertible notes, each subject to a Loan and
    Security Agreement securing the repayment of such notes with all
    of our assets, with Kips Bay Investments, LLC, or KBI. Pursuant
    to the Investment Agreement, which was executed prior to KBI
    becoming a 5% or more beneficial holder of our common stock,
    <FONT style="font-variant: SMALL-CAPS">KBI</FONT> agreed to sell
    us all right and title to certain intellectual
</DIV>
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<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">70</FONT></I>
</DIV><!-- END PAGE WIDTH -->
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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    property assets for $100,000 in the form of a first secured
    convertible note, and to loan us $2.9&#160;million in exchange
    for a second secured convertible note, or collectively the
    Notes. The Notes accrued interest at a rate of nine percent per
    annum, and were convertible into an aggregate of
    4,800,000&#160;shares of our common stock for repayment of
    principal, representing a conversion price of $0.625 per share,
    and conversion of accrued interest also at $0.625 per share. The
    Investment Agreement also granted KBI two separate stock
    purchase options, each for the right to purchase up to
    600,000&#160;shares of common stock for $3.5&#160;million when
    we achieved defined milestones. The Investment Agreement also
    provides certain registration rights to KBI. See
    &#147;Description of Capital Stock&#151;Registration
    Rights.&#148;
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In April 2008, we achieved our first defined milestone and KBI
    subsequently exercised its first stock purchase option under the
    Investment Agreement, purchasing 600,000&#160;shares of our
    common stock for a purchase price of $3.5&#160;million. On
    February&#160;25, 2009, KBI elected to convert the entire amount
    of principal and $217,188 of the $467,188 in accrued interest on
    the Notes into 5,147,389&#160;shares of our common stock which
    conversion occurred in March 2009. The remaining accrued
    interest of $250,000 was paid in cash concurrent with KBI&#146;s
    conversion election. In February&#160;2010, KBI exercised its
    second stock purchase option under the Investment Agreement, the
    second milestone having previously been achieved by us,
    purchasing 600,000&#160;shares of our common stock for a
    purchase price of $3.5&#160;million. At that time we also agreed
    to convert the $250,000 of interest on the Notes previously paid
    in cash to common stock, and pursuant to this conversion, KBI
    repaid the $250,000 to us and we issued 400,000&#160;shares of
    our common stock to KBI. The exercise of stock purchase options
    were made pursuant to a Stock Purchase Agreement between KBI and
    us, whereby each party agreed to indemnify the other for any
    breach of the agreement or violation of securities law, and
    whereby KBI made certain standard investment representations and
    warranties.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In connection with the execution of the Notes, we entered into a
    Loan and Security Agreement with KBI, whereby we granted a
    security interest in all of our existing and to-be-acquired
    property and proceeds therefrom, including all intellectual
    property assets transferred by KBI to us pursuant to the first
    secured convertible note. The Loan and Security Agreement
    terminated upon conversion of the Notes.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Due to the conversion of the Notes, exercise of the stock
    purchase options, and other purchases of our common stock, as of
    March&#160;1, 2010, KBI beneficially owns 49.9% of our common
    stock.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Private
    Placements of Our Common Stock</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In March 2009, we commenced a private offering of a minimum of
    500,000&#160;shares of our common stock and up to a maximum of
    1,666,667&#160;shares of our common stock to certain accredited
    investors at an offering price of $6.00 per share. We sold an
    aggregate of 516,241&#160;shares of common stock in the private
    offering, which was completed in August 2009. KBI purchased
    41,667&#160;shares of our common stock in this private offering.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Promoters and
    Certain Control Persons</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We were incorporated in the State of Delaware in May 2007 and
    5,400,000&#160;shares of common stock were issued to Manny
    Villafa&#241;a on July&#160;17, 2007 for consideration of
    $90,000.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Mr.&#160;Villafa&#241;a may be deemed a promoter as defined in
    Rule&#160;405 under the Securities Act of 1933, as amended.
</DIV>
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<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">71</FONT></I>
</DIV><!-- END PAGE WIDTH -->
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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<A name='115'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Principal
    Stockholders</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The following table sets forth information regarding the
    beneficial ownership of our common stock as of March&#160;1,
    2010 and as adjusted to reflect the sale of the common stock in
    this offering for:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    each person, or group of affiliated persons, known by us to
    beneficially own more than 5% of our common stock;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    each of our named executive officers;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    each of our directors;&#160;and
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    all of our directors and executive officers as a group.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The percentage ownership information shown in the table is based
    upon 13,581,791&#160;shares of common stock outstanding as of
    March&#160;1, 2010, and the issuance
    of&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;shares
    of common stock in this offering. The percentage ownership
    information assumes no exercise of the underwriter&#146;s option
    to purchase additional shares.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Information with respect to beneficial ownership has been
    furnished by each director, officer or beneficial owner of more
    than 5% of our common stock. We have determined beneficial
    ownership in accordance with the rules of the SEC. These rules
    generally attribute beneficial ownership of securities to
    persons who possess sole or shared voting power or investment
    power with respect to those securities. In addition, the rules
    include shares of common stock issuable pursuant to the exercise
    of stock options that are either immediately exercisable or
    exercisable on or before April&#160;30, 2010, which is
    60&#160;days after March&#160;1, 2010. These shares are deemed
    to be outstanding and beneficially owned by the person holding
    those options for the purpose of computing the percentage
    ownership of that person. Unless otherwise indicated, the
    persons or entities identified in this table have sole voting
    and investment power with respect to all shares shown as
    beneficially owned by them, subject to applicable community
    property laws.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Unless otherwise noted below, the address for each person or
    entity listed in the table is
    <FONT style="white-space: nowrap">c/o&#160;Kips</FONT>
    Bay Medical, Inc., 3405 Annapolis Lane North, Suite&#160;200,
    Minneapolis, Minnesota 55447.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="57%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="10%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="5%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="5%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=05 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=05 type=lead -->
    <TD width="4%" align="right">&nbsp;</TD>	<!-- colindex=05 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=05 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="16" nowrap align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Beneficial Ownership</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Options<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" nowrap align="center" valign="bottom">
    <B>Percentage of Shares<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Number of Shares<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Exercisable<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Beneficially Owned</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Held Before the<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>within 60<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Before this<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>After this<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Beneficial Owner</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Offering</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Days</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Offering</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Offering</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="color: #000000; background: #CCEEFF">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    <B><I>5% Stockholders</I></B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Kips Bay Investments, LLC(1)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    6,789,056
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    &#151;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    49.9
</TD>
<TD nowrap align="left" valign="top">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="top">
<DIV style="text-indent: 0pt; margin-left: 10pt">
    7803 Glenroy Road, Suite&#160;300<BR>
    Bloomington, Minnesota 55438
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="color: #000000; background: #CCEEFF">
<TD align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <B><I>Directors and Named Executive Officers</I></B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Manny Villafa&#241;a
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    5,400,000
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    &#151;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    39.7
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="color: #000000; background: #CCEEFF">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Michael Winegar
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    300,000
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    35,000
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    2.5
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    All directors and executive officers as a group (3&#160;persons)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    5,700,000
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    35,000
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    42.2
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="17" valign="top">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

<TR>
    <TD width="2%"></TD>
    <TD width="1%"></TD>
    <TD width="97%"></TD>
</TR>

<TR>
    <TD align="right" valign="top">
    (1) </TD>
    <TD></TD>
    <TD valign="bottom">
    Voting and dispositive authority for the shares held of record
    by Kips Bay Investments, LLC are held by Nasser Kazeminy,
    members of his family, and certain trusts for the benefit of his
    children and grandchildren.</TD>
</TR>

</TABLE>
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<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">72</FONT></I>
</DIV><!-- END PAGE WIDTH -->
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<A name='116'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Description of
    Capital Stock</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Upon the closing of this offering, our authorized capital stock
    will consist of 40,000,000&#160;shares of common stock, par
    value $0.01 per share, and 10,000,000&#160;shares of
    undesignated stock, par value $0.01 per share.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The following summarizes important provisions of our common
    stock and describes certain material provisions of our
    certificate of incorporation and amended and restated bylaws.
    This summary is qualified by our certificate of incorporation
    and amended and restated bylaws, copies of which have been filed
    as exhibits to the registration statement of which this
    prospectus is a part, and by the provisions of applicable law.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Common
    Stock</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Outstanding
    Shares</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    As of March&#160;1, 2010, there were 13,581,791&#160;shares of
    common stock outstanding held of record by 64 stockholders. All
    of our issued and outstanding shares of common stock are duly
    authorized, validly issued, fully paid and non-assessable. After
    giving effect to the sale of common stock offered in this
    offering, there will
    be&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;shares
    of common stock outstanding.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Dividend
    Rights</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The holders of our outstanding shares of common stock are
    entitled to receive dividends, if any, as may be declared out of
    legally available funds at the times and the amounts as our
    board of directors may from time to time determine.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Voting
    Rights</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Each holder of common stock is entitled to one vote for each
    share of common stock held on all matters submitted to a vote of
    the stockholders, including the election of directors. Our
    certificate of incorporation and amended and restated bylaws do
    not provide for cumulative voting rights. Because of this, the
    holders of a majority of the shares of common stock entitled to
    vote in any election of directors can elect all of the directors
    standing for election, if they should so choose.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">No Preemptive
    or Similar Rights</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The common stock is not entitled to preemptive rights and is not
    subject to conversion or redemption.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Right to
    Receive Liquidation Distributions</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In the event of our liquidation, dissolution or winding up,
    holders of common stock will be entitled to share ratably in the
    net assets legally available for distribution to stockholders
    after the payment of all of our debts and other liabilities.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Undesignated
    Stock</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our board of directors has the authority, without first
    obtaining approval of our stockholders, to establish from the
    undesignated shares, one or more series of preferred stock and
    to fix the powers, preferences, rights and limitations of such
    class or series, including dividend rights, voting rights, and
    the right to receive liquidation distributions.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Options</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    As of March&#160;1, 2010, we had outstanding options to purchase
    an aggregate of 783,000&#160;shares of our common stock at a
    weighted average exercise price of $4.01 per share under our
    2007 Long-Term Incentive Plan. All outstanding options provide
    for adjustments in the event of a merger, consolidation,
    reorganization, recapitalization, stock dividend, stock split or
    other similar change in our corporate structure. As of
    March&#160;1, 2010, 1,216,000 additional&#160;shares are
    reserved and available for issuance under our 2007 Long-Term
    Incentive Plan.
</DIV>
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<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">73</FONT></I>
</DIV><!-- END PAGE WIDTH -->
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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Registration
    Rights</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Investment Agreement, dated July&#160;19, 2007, between KBI
    and us provides that we will file a registration statement under
    the Securities Act of 1933, as amended, covering the re-sale of
    1,000,000 or more shares of our common stock within 90&#160;days
    of a request by KBI. We are not obligated to take any
    registration-related actions during the following periods:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    prior to the date that is six months following the effective
    date of our first registered public offering pursuant to a firm
    commitment underwritten offering;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    during the period starting with the date that is 90&#160;days
    prior to our good faith estimated date of filing of, and ending
    on the date three months immediately following the effective
    date of, any registration statement pertaining to our
    securities, provided certain conditions are met;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    after we have effected two registrations of our securities for
    KBI, excluding registrations effected on
    <FONT style="white-space: nowrap">Form&#160;S-3</FONT>
    or any successor form, and such registrations have been declared
    effective;&#160;and
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    if we furnish to KBI a certificate stating that in the good
    faith judgment of the board of directors that it would be
    seriously detrimental to us or our stockholders for a
    registration statement to be filed in the near future, which
    certificate may only be used once in any
    <FONT style="white-space: nowrap">12-month</FONT>
    period, and which certificate may only defer our registration
    obligation for a maximum of 120&#160;days.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Anti-Takeover
    Effects of Provisions of the Certificate of Incorporation and
    Amended and Restated Bylaws</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Provisions of our certificate of incorporation and amended and
    restated bylaws may delay or discourage transactions involving
    an actual or potential change in our control or change in our
    management, including transactions in which stockholders might
    otherwise receive a premium for their shares, or transactions
    that our stockholders might otherwise deem to be in their best
    interests. Therefore, these provisions could adversely affect
    the price of our common stock. Among other things, our
    certificate of incorporation and amended and restated bylaws:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    provide that all vacancies, including newly created
    directorships, may, except as otherwise required by law, be
    filled by the affirmative vote of a majority of directors then
    in office, even if less than a quorum;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    require that any action to be taken by our stockholders must be
    effected at a duly called annual or special meeting of
    stockholders and not be taken by written consent;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    provide that stockholders seeking to present proposals before a
    meeting of stockholders or to nominate candidates for election
    as directors at a meeting of stockholders must provide notice in
    writing in a timely manner, and also specify requirements as to
    the form and content of a stockholder&#146;s notice;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    do not provide for cumulative voting rights (therefore allowing
    the holders of a majority of the shares of common stock entitled
    to vote in any election of directors to elect all of the
    directors standing for election, if they should so choose);
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    provide that special meetings of our stockholders may be called
    only by the Chairman of the Board, our Chief Executive Officer
    or by the board of directors pursuant to a resolution adopted by
    a majority of the total number of authorized directors;&#160;and
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    provide that stockholders will be permitted to amend our amended
    and restated bylaws only upon receiving at least
    66<FONT style="vertical-align: text-top; font-size: 70%;">2</FONT>/<FONT style="font-size: 70%;">3</FONT>%
    of the votes entitled to be cast by holders of all outstanding
    shares then entitled to vote generally in the election of
    directors, voting together as a single class.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The amendment of any of these provisions requires approval by
    the holders of at least
    66<FONT style="vertical-align: text-top; font-size: 70%;">2</FONT>/<FONT style="font-size: 70%;">3</FONT>%
    of our then outstanding common stock, voting as a single class.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Section&#160;203
    of the General Corporation Law of the State of
    Delaware</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We are subject to Section&#160;203 of the Delaware General
    Corporation Law. Section&#160;203 generally prohibits a public
</DIV>
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<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">74</FONT></I>
</DIV><!-- END PAGE WIDTH -->
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Delaware corporation from engaging in a &#147;business
    combination&#148; with an &#147;interested stockholder&#148; for
    a period of three years after the date of the transaction in
    which the person became an interested stockholder, unless:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    prior to the date of the transaction, the board of directors of
    the corporation approved either the business combination or the
    transaction that resulted in the stockholder becoming an
    interested stockholder;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the interested stockholder owned at least 85% of the voting
    stock of the corporation outstanding at the time the transaction
    commenced, excluding for purposes of determining the number of
    shares outstanding (a)&#160;shares owned by persons who are
    directors and also officers and (b)&#160;shares owned by
    employee stock plans in which employee participants do not have
    the right to determine confidentially whether shares held
    subject to the plan will be tendered in a tender or exchange
    offer;&#160;or
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    on or subsequent to the date of the transaction, the business
    combination is approved by the board and authorized at an annual
    or special meeting of stockholders, and not by written consent,
    by the affirmative vote of at least
    66<FONT style="vertical-align: text-top; font-size: 70%;">2</FONT>/<FONT style="font-size: 70%;">3</FONT>%
    of the outstanding voting stock which is not owned by the
    interested stockholder.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Section&#160;203 defines a business combination to include:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    any merger or consolidation involving the corporation and the
    interested stockholder;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    any sale, transfer, pledge or other disposition involving the
    interested stockholder of 10% or more of the assets of the
    corporation;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    subject to exceptions, any transaction that results in the
    issuance or transfer by the corporation of any stock of the
    corporation to the interested stockholder;&#160;and
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the receipt by the interested stockholder of the benefit of any
    loans, advances, guarantees, pledges or other financial benefits
    provided by or through the corporation.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In general, Section&#160;203 defines an interested stockholder
    as any entity or person beneficially owning 15% or more of the
    outstanding voting stock of the corporation and any entity or
    person affiliated with or controlling or controlled by the
    entity or person.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Limitation on
    Liability of Directors and Indemnification</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our certificate of incorporation limits the liability of our
    directors to the fullest extent permitted by Delaware law.
    Delaware law provides that directors of a corporation will not
    be personally liable for monetary damages for breach of their
    fiduciary duties as directors, except for liability for any:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    breach of their duty of loyalty to us or our stockholders;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    act or omission not in good faith or that involves intentional
    misconduct or a knowing violation of law;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    unlawful payment of dividends or redemption of shares as
    provided in Section 174 of the Delaware General Corporation
    Law;&#160;or
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    transaction from which the directors derived an improper
    personal benefit.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    These limitations of liability do not apply to liabilities
    arising under federal securities laws and do not affect the
    availability of equitable remedies such as injunctive relief or
    rescission.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our amended and restated bylaws provide that we will indemnify
    our directors and executive officers, and may indemnify other
    officers, employees and other agents, to the fullest extent
    permitted by law. Our amended and restated bylaws also permit us
    to secure insurance on behalf of any officer, director, employee
    or other agent for any liability arising out of his or her
    actions in connection with their services to us, regardless of
    whether our amended and restated bylaws permit indemnification.
    We have obtained a directors&#146; and officers&#146; liability
    insurance policy.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have entered, and intend to continue to enter, into separate
    indemnification agreements with our directors and executive
    officers, in addition to the indemnification provided for in our
    certificate of incorporation and amended and restated bylaws.
    These agreements, among other things, require us to indemnify
    our directors and executive officers for certain expenses,
    including attorneys&#146; fees, judgments, fines and settlement
    amounts incurred by a director or executive officer in any
    action or proceeding arising out of their services as one of our
    directors or
</DIV>
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    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">75</FONT></I>
</DIV><!-- END PAGE WIDTH -->
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    executive officers, or any of our subsidiaries or any other
    company or enterprise to which the person provides services at
    our request.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    At present, there is no pending litigation or proceeding
    involving any of our directors or executive officers as to which
    indemnification is required or permitted, and we are not aware
    of any threatened litigation or proceeding that may result in a
    claim for indemnification.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Insofar as indemnification for liabilities arising under the
    Securities Act of 1933, as amended, 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 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 and will be governed by the final
    adjudication of such issue.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Stock
    Exchange</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We intend to apply for the listing of our common stock on the
    NASDAQ Global Market under the symbol &#147;KIPS.&#148;
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Transfer Agent
    and Registrar</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The transfer agent and registrar for our common stock is Wells
    Fargo Shareowner Services.
</DIV>
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<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">76</FONT></I>
</DIV><!-- END PAGE WIDTH -->
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<A name='117'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Shares&#160;Eligible
    For Future Sale</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Prior to this offering, no public market existed for our common
    stock. Market sales of shares of our common stock after this
    offering and from time to time, and the availability of shares
    for future sale, may reduce the market price of our common
    stock. Sales of substantial amounts of our common stock, or the
    perception that these sales could occur, could adversely affect
    prevailing market prices for our common stock and could impair
    our future ability to obtain capital, especially through an
    offering of equity securities.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Based on the number of shares of common stock outstanding as
    of&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;,
    2010, upon completion of this
    offering,&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;shares
    of common stock will be outstanding, assuming no exercise of the
    underwriter&#146;s option to purchase additional shares and no
    exercise of options prior to the completion of this offering.
    All of the shares sold in this offering will be freely tradable
    without restrictions or further registration under the
    Securities Act of 1933, as amended, unless held by our
    affiliates as that term is defined under Rule&#160;144 under the
    Securities Act.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The
    remaining&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;shares
    of common stock outstanding upon the closing of this offering
    are restricted securities as defined under Rule&#160;144 of the
    Securities Act. Restricted securities may be sold in the
    U.S.&#160;public market only if registered or if they qualify
    for an exemption from registration, including by reason of
    Rule&#160;144 or 701 under the Securities Act, which rules are
    summarized below. These remaining shares will generally become
    available for sale in the public market as follows:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    approximately&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;
    restricted shares will be eligible for sale in the public market
    upon completion of this offering under Rule&#160;144;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    approximately&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;
    restricted shares will be eligible for sale in the public market
    90&#160;days after the date of this prospectus, subject to the
    volume, manner of sale and other limitations under Rule&#160;144
    and Rule&#160;701;&#160;and
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    approximately&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;
    restricted shares will be eligible for sale in the public market
    upon expiration of
    <FONT style="white-space: nowrap">lock-up</FONT>
    agreements 180&#160;days after the date of this prospectus,
    which date may be extended in specified circumstances, subject
    in certain circumstances to the volume, manner of sale and other
    limitations under Rule&#160;144 and Rule 701.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Additionally, of the 783,000&#160;shares of common stock
    issuable upon exercise of options outstanding as of
    March&#160;1, 2010,
    approximately&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;shares
    will be vested and eligible for sale 180&#160;days after the
    date of this prospectus.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Rule&#160;144</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In general, under Rule&#160;144 under the Securities Act, as in
    effect on the date of this prospectus, beginning 90&#160;days
    after the date of this prospectus, a person who is not one of
    our affiliates at any time during the three months preceding a
    sale, and who has beneficially owned shares of our common stock
    to be sold for at least six months, would be entitled to sell an
    unlimited number of shares of our common stock, provided current
    public information about us is available. In addition, under
    Rule&#160;144, a person who is not one of our affiliates at any
    time during the three months preceding a sale, and who has
    beneficially owned the shares of our common stock to be sold for
    at least one year, would be entitled to sell an unlimited number
    of shares immediately upon the closing of this offering without
    regard to whether current public information about us is
    available. Beginning 90&#160;days after the date of this
    prospectus, our affiliates who have beneficially owned shares of
    our common stock for at least six months are entitled to sell
    within any three-month period a number of shares that does not
    exceed the greater of:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    one percent of the number of shares of our common stock then
    outstanding, which will equal
    approximately&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;
    shares immediately after this offering;&#160;and
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the average weekly trading volume of our common stock on The
    NASDAQ Global Market during the four calendar weeks preceding
    the filing of a notice on Form&#160;144 with respect to the
    sale, or if no such notice is required, the date of receipt of
    the order to execute the sale.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Sales of restricted shares under Rule&#160;144 by our affiliates
    are also subject to requirements regarding the manner of sale,
    notice and the availability of current public information about
    us. Rule&#160;144 also provides that affiliates relying
</DIV>
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    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">77</FONT></I>
</DIV><!-- END PAGE WIDTH -->
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    on Rule&#160;144 to sell shares of our common stock that are not
    restricted shares must nonetheless comply with the same
    restrictions applicable to restricted shares, other than the
    holding period requirement.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Notwithstanding the availability of Rule&#160;144, holders
    of&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;
    of our restricted shares have entered into
    <FONT style="white-space: nowrap">lock-up</FONT>
    agreements as described below under &#147;Underwriting&#148; and
    their restricted shares will become eligible for sale at the
    expiration of the restrictions set forth in those agreements,
    subject to any exceptions set forth therein or waivers by the
    underwriters.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Rule&#160;701</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Rule&#160;701 under the Securities Act, as in effect on the date
    of this prospectus, permits resales of shares in reliance upon
    Rule&#160;144 but without compliance with some of the
    restrictions of Rule&#160;144, including the holding period
    requirement. Most of our employees, executive officers,
    directors or consultants who purchased shares under a written
    compensatory plan or contract, such as the shares issued under
    our 2007 Long-Term Incentive Plan, may be entitled to rely on
    the resale provisions of Rule&#160;701, but all holders of
    Rule&#160;701&#160;shares are required to wait until
    90&#160;days after the date of this prospectus before selling
    their shares under Rule&#160;701. However, all of the
    Rule&#160;701&#160;shares are subject to
    <FONT style="white-space: nowrap">lock-up</FONT>
    agreements as described below and under &#147;Underwriting&#148;
    and will become eligible for sale at the expiration of the
    restrictions set forth in those agreements.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica"><FONT style="white-space: nowrap">Lock-up</FONT>
    Agreements</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We, along with our directors, executive officers and the holders
    of substantially all of our outstanding common stock and stock
    options, have agreed with the underwriters that for a period of
    180&#160;days, subject to a possible extension under certain
    circumstances, following the date of this prospectus, we or they
    will not offer, sell, assign, transfer, pledge, contract to sell
    or otherwise dispose of or hedge any shares of our common stock
    or any securities convertible into or exchangeable for shares of
    common stock, subject to specified exceptions, without the prior
    written consent of Jefferies&#160;&#038; Company, Inc. After the
    <FONT style="white-space: nowrap">180-day</FONT>
    <FONT style="white-space: nowrap">lock-up</FONT>
    period, these shares may be sold, subject to applicable
    securities laws.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Registration
    Rights</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    KBI received certain registration rights in connection with the
    execution of the Investment Agreement dated July&#160;19, 2007.
    See &#147;Description of Capital Stock&#151;Registration
    Rights.&#148;
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Equity Incentive
    Plans</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We intend to file registration statements under the Securities
    Act as promptly as possible after the effective date of this
    offering to register shares to be issued pursuant to our
    employee benefit plans. As a result, any options or rights
    exercised under our 2007 Long-Term Incentive Plan or any other
    benefit plan after the effectiveness of the registration
    statements will also be freely tradable in the public market,
    subject to the
    <FONT style="white-space: nowrap">lock-up</FONT>
    agreements discussed above. However, such shares held by
    affiliates will still be subject to the volume limitation,
    manner of sale, notice and public information requirements of
    Rule&#160;144 and the
    <FONT style="white-space: nowrap">180-day</FONT>
    <FONT style="white-space: nowrap">lock-up</FONT>
    arrangement described above, if applicable.
</DIV>
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">78</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<A name='118'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Underwriting</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Subject to the terms and conditions set forth in the
    underwriting agreement to be dated on or
    about&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;,
    2010, between us and Jefferies&#160;&#038; Company, Inc., as
    underwriter, we have agreed to sell to the underwriter and the
    underwriter has agreed to purchase from us, the entire number of
    shares of common stock offered by this prospectus.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The underwriting agreement provides that the obligations of
    Jefferies&#160;&#038; Company, Inc. are subject to certain
    conditions precedent such as the receipt by
    Jefferies&#160;&#038; Company, Inc. of officers&#146;
    certificates and legal opinions and approval of certain legal
    matters by their counsel. The underwriting agreement provides
    that Jefferies&#160;&#038; Company, Inc. will purchase all of
    the shares if any of them are purchased. We have agreed to
    indemnify Jefferies&#160;&#038; Company, Inc. and certain of its
    controlling persons against certain liabilities, including
    liabilities under the Securities Act, and to contribute to
    payments that Jefferies&#160;&#038; Company, Inc. may be
    required to make in respect of those liabilities.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Jefferies&#160;&#038; Company, Inc. has advised us that it
    currently intends to make a market in the common stock. However,
    Jefferies&#160;&#038; Company, Inc. is not obligated to do so
    and may discontinue any market-making activities at any time
    without notice. No assurance can be given as to the liquidity of
    the trading market for the common stock.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Jefferies&#160;&#038; Company, Inc. is offering the common stock
    subject to its acceptance of the shares from us and subject to
    prior sale. Jefferies&#160;&#038; Company, Inc. reserves the
    right to withdraw, cancel or modify offers to the public and to
    reject orders in whole or in part. In addition,
    Jefferies&#160;&#038; Company, Inc. has advised us that it does
    not expect sales to accounts over which they have discretionary
    authority to exceed 5% of the common stock being offered.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Commission and
    Expenses</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Jefferies&#160;&#038; Company, Inc. has advised us that it
    proposes to offer the common stock to the public at the initial
    public offering price set forth on the cover page of this
    prospectus and to certain dealers at that price less a
    concession not in excess of $&#160;&#160;&#160;&#160;&#160; per
    share of common stock. Jefferies&#160;&#038; Company, Inc. may
    allow, and certain dealers may reallow, a discount from the
    concession not in excess of $&#160;&#160;&#160;&#160;&#160; per
    share of common stock to certain brokers and dealers. After the
    offering, the initial public offering price, concession and
    reallowance to dealers may be reduced by Jefferies&#160;&#038;
    Company, Inc. No such reduction will change the amount of
    proceeds to be received by us as set forth on the cover page of
    this prospectus.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The following table shows the public offering price, the
    underwriting discounts and commissions that we are to pay
    Jefferies&#160;&#038; Company, Inc. and the proceeds, before
    expenses, to us in connection with this offering. Such amounts
    are shown assuming both no exercise and full exercise of
    Jefferies&#160;&#038; Company, Inc.&#146;s option to purchase
    additional shares.
</DIV>

<DIV style="margin-top: 9pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="37%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="11%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="11%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="11%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=05 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=05 type=lead -->
    <TD width="11%" align="right">&nbsp;</TD>	<!-- colindex=05 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=05 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="16" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Per Share</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Total</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Without<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>With<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Without<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>With<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Option to Purchase<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Option to Purchase<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Option to Purchase<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Option to Purchase<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Additional Shares</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Additional Shares</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Additional Shares</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Additional Shares</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Public offering price
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
    $
</TD>
<TD nowrap align="right" valign="top">
    &#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
    $
</TD>
<TD nowrap align="right" valign="top">
    &#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
    $
</TD>
<TD nowrap align="right" valign="top">
    &#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
    $
</TD>
<TD nowrap align="right" valign="top">
    &#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Underwriting discounts and commissions paid by us
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
    $
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
    $
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
    $
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
    $
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Proceeds to us, before expenses
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
    $
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
    $
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
    $
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
    $
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="17" valign="top">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We estimate expenses payable by us in connection with this
    offering, other than the underwriting discounts and commissions
    referred to above, will be approximately
    $&#160;&#160;&#160;&#160;&#160; .
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Determination of
    Offering Price</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Prior to the offering, there has not been a public market for
    our common stock. Consequently, the initial public
</DIV>
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<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">79</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    offering price for our common stock will be determined by
    negotiations between us and Jefferies&#160;&#038; Company, Inc.
    Among the factors to be considered in these negotiations will be
    prevailing market conditions, our financial information, market
    valuations of other companies that we and Jefferies&#160;&#038;
    Company, Inc. believe to be comparable to us, estimates of our
    business potential, the present state of our development and
    other factors deemed relevant.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We offer no assurances that the initial public offering price
    will correspond to the price at which the common stock will
    trade in the public market subsequent to the offering or that an
    active trading market for the common stock will develop and
    continue after the offering.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Listing</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We intend to apply to have our common stock approved for listing
    on the Nasdaq Global Market under the trading symbol
    &#147;KIPS.&#148;
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Option to
    Purchase Additional Shares</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have granted to Jefferies&#160;&#038; Company, Inc. an
    option, exercisable for 30&#160;days from the date of this
    prospectus, to purchase up to an aggregate
    of&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;
    additional shares of common stock at the public offering price
    set forth on the cover page of this prospectus, less
    underwriting discounts and commissions. This option may be
    exercised only if Jefferies&#160;&#038; Company, Inc. sells more
    shares than the total number set forth on the cover page of this
    prospectus.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">No Sales of
    Similar Securities</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We, our officers, directors and holders of all or substantially
    all our outstanding capital shares and other securities have
    agreed, subject to specified exceptions, not to directly or
    indirectly:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    sell, offer, contract or grant any option to sell (including any
    short sale), pledge, transfer, establish an open &#147;put
    equivalent position&#148; within the meaning of
    <FONT style="white-space: nowrap">Rule&#160;16a-l(h)</FONT>
    under the Securities Exchange Act of 1934, as amended,&#160;or
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    otherwise dispose of any common shares, options or warrants to
    acquire common shares, or securities exchangeable or exercisable
    for or convertible into common shares currently or hereafter
    owned either of record or beneficially,&#160;or
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    publicly announce an intention to do any of the foregoing for a
    period of 180&#160;days after the date of this prospectus
    without the prior written consent of the underwriter.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    This restriction terminates after the close of trading of the
    common shares on and including the 180&#160;days after the date
    of this prospectus. However, subject to certain exceptions, in
    the event that either:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    during the last 17&#160;days of the
    <FONT style="white-space: nowrap">180-day</FONT>
    restricted period, we issue an earnings release or material news
    or a material event relating to us occurs,&#160;or
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    prior to the expiration of the
    <FONT style="white-space: nowrap">180-day</FONT>
    restricted period, we announce that we will release earnings
    results during the
    <FONT style="white-space: nowrap">16-day</FONT>
    period beginning on the last day of the
    <FONT style="white-space: nowrap">180-day</FONT>
    restricted period,
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    then in either case the expiration of the
    <FONT style="white-space: nowrap">180-day</FONT>
    restricted period will be extended until the expiration of the
    <FONT style="white-space: nowrap">18-day</FONT>
    period beginning on the date of the issuance of an earnings
    release or the occurrence of the material news or event, as
    applicable, unless Jefferies&#160;&#038; Company, Inc. waives,
    in writing, such an extension.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Jefferies&#160;&#038; Company, Inc. may, in its sole discretion
    and at any time or from time to time before the termination of
    the <FONT style="white-space: nowrap">180-day</FONT>
    period, without public notice, release all or any portion of the
    securities subject to
    <FONT style="white-space: nowrap">lock-up</FONT>
    agreements. There are no existing agreements between
    Jefferies&#160;&#038; Company, Inc. and any of our shareholders
    who will execute a
    <FONT style="white-space: nowrap">lock-up</FONT>
    agreement, providing consent to the sale of shares prior to the
    expiration of the
    <FONT style="white-space: nowrap">lock-up</FONT>
    period.
</DIV>
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<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">80</FONT></I>
</DIV><!-- END PAGE WIDTH -->
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Stabilization</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The underwriter has advised us that, pursuant to
    Regulation&#160;M under the Securities Exchange Act of 1934, as
    amended, certain persons participating in the offering may
    engage in transactions, including overallotment, stabilizing
    bids, syndicate covering transactions or the imposition of
    penalty bids, which may have the effect of stabilizing or
    maintaining the market price of the common stock at a level
    above that which might otherwise prevail in the open market.
    Overallotment involves syndicate sales in excess of the offering
    size, which creates a syndicate short position.
    &#147;Covered&#148; short sales are sales made in an amount not
    greater than the underwriter&#146;s option to purchase
    additional common shares in this offering. The underwriter may
    close out any covered short position by either exercising their
    option to purchase additional common shares or purchasing common
    shares in the open market. In determining the source of shares
    to close out the covered short position, the underwriter 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 option to purchase
    additional shares. &#147;Naked&#148; short sales are sales in
    excess of the option to purchase additional common shares. The
    underwriter must close out any naked short position by
    purchasing shares in the open market. A naked short position is
    more likely to be created if the underwriter is concerned that
    there may be downward pressure on the price of the common shares
    in the open market after pricing that could adversely affect
    investors who purchase in this offering. A stabilizing bid is a
    bid for the purchase of common stock on behalf of the
    underwriter for the purpose of fixing or maintaining the price
    of the common stock. A syndicate covering transaction is the bid
    for or the purchase of common stock on behalf of the underwriter
    to reduce a short position incurred by the underwriter in
    connection with the offering. A penalty bid is an arrangement
    permitting the underwriter to reclaim the selling concession
    otherwise accruing to a syndicate member in connection with the
    offering if the notes originally sold by such syndicate member
    are purchased in a syndicate covering transaction and therefore
    have not been effectively placed by such syndicate member.
    Neither we nor the underwriter makes 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. The underwriter is not obligated to engage in
    these activities and, if commenced, any of the activities may be
    discontinued at any time.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Electronic
    Distribution</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    A prospectus in electronic format may be made available by
    <FONT style="white-space: nowrap">e-mail</FONT> or on
    the web sites or through online services maintained by
    Jefferies&#160;&#038; Company, Inc. or its affiliates. In those
    cases, prospective investors may view offering terms online and
    may be allowed to place orders online. Jefferies&#160;&#038;
    Company, Inc. may agree with us to allocate a specific number of
    common stock for sale to online brokerage account holders. Any
    such allocation for online distributions will be made by
    Jefferies&#160;&#038; Company on the same basis as other
    allocations. Other than the prospectus in electronic format, the
    information on Jefferies&#160;&#038; Company, Inc.&#146;s web
    site and any information contained in any other web site
    maintained by Jefferies&#160;&#038; Company, Inc. is not part of
    this prospectus, has not been approved
    <FONT style="white-space: nowrap">and/or</FONT>
    endorsed by us or Jefferies&#160;&#038; Company, Inc. and should
    not be relied upon by investors.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Affiliations</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Jefferies&#160;&#038; Company, Inc. or its affiliates from time
    to time may in the future provide investment banking, commercial
    lending and financial advisory services to us and our affiliates
    in the ordinary course of business. Jefferies&#160;&#038;
    Company, Inc. and its affiliates, as applicable, will receive
    customary compensation and reimbursement of expenses in
    connection with such services.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">European Economic
    Area</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In relation to each Member State of the European Economic Area
    which has implemented the Prospectus Directive (as defined
    below) (each, a Relevant Member State), with effect from and
    including the date on which the Prospectus Directive is
    implemented in that Relevant Member State, or the Relevant
    Implementation Date, an offer of our common stock to the public
    may not be made in that Relevant Member State prior to the
    publication of a prospectus in relation to our common stock
    which has been approved by the competent authority in that
    Relevant Member State or, where appropriate, approved in another
    Relevant Member State and notified to the competent authority in
    that Relevant Member State, all in accordance with the
    Prospectus Directive, except that an
</DIV>
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<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">81</FONT></I>
</DIV><!-- END PAGE WIDTH -->
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    offer to the public in that Relevant Member State of any shares
    of our common stock may be made at any time under the following
    exemptions under the Prospectus Directive if they have been
    implemented in the Relevant Member State:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (a)&#160;to legal entities which are authorized or regulated to
    operate in the financial markets or, if not so authorized or
    regulated, whose corporate purpose is solely to invest in
    securities;
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (b)&#160;to any legal entity which has two or more of
    (1)&#160;an average of at least 250&#160;employees during the
    last financial year; (2)&#160;a total balance sheet of more than
    &#128;43,000,000 and (3)&#160;an annual net turnover of more
    than &#128;50,000,000, as shown in its last annual or
    consolidated accounts;
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (c)&#160;to fewer than 100 natural or legal persons per Relevant
    Member State (other than qualified investors as defined in the
    Prospectus Directive);&#160;or
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (d)&#160;in any other circumstances falling within
    Article&#160;3(2) of the Prospectus Directive,
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    provided that no such offer of our common stock shall result in
    a requirement for the publication by us or any underwriter of a
    prospectus pursuant to Article&#160;3 of the Prospectus
    Directive.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    For the purposes of this provision, the expression an
    &#147;offer of our common stock to the public&#148; in relation
    to any shares of our common stock in any Relevant Member State
    means the communication in any form and by any means of
    sufficient information on the terms of the offer and our common
    stock to be offered so as to enable an investor to decide to
    purchase or subscribe our common stock, as the same may be
    varied in that Member State by any measure implementing the
    Prospectus Directive in that Member State and the expression
    &#147;Prospectus Directive&#148; means Directive 2003/71/EC and
    includes any relevant implementing measure in each Relevant
    Member State.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">United
    Kingdom</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Shares of our common stock may not be offered or sold and will
    not be offered or sold to any persons in the United Kingdom
    other than to persons whose ordinary activities involve them in
    acquiring, holding, managing or disposing of investments (as
    principal or as agent) for the purposes of their businesses or
    otherwise in circumstances which have not resulted or will not
    result in an offer to the public in the United Kingdom within
    the meaning of the Financial Services and Markets Act 2000, or
    the FSMA.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In addition, any invitation or inducement to engage in
    investment activity (within the meaning of section&#160;21 of
    the FSMA) in connection with the issue or sale of shares of our
    common stock may only be communicated or caused to be
    communicated in circumstances in which Section&#160;21(1) of the
    FSMA does not apply to us. Without limitation to the other
    restrictions referred to herein, this prospectus is directed
    only at (1)&#160;persons outside the United Kingdom or
    (2)&#160;persons who:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (a)&#160;are qualified investors as defined in
    section&#160;86(7) of FSMA, being persons falling within the
    meaning of article&#160;2.1(e)(i), (ii)&#160;or (iii)&#160;of
    the Prospectus Directive;&#160;and
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (b)&#160;are either persons who fall within article&#160;19(1)
    of the Financial Services and Markets Act 2000 (Financial
    Promotion) Order 2005, as amended, or Order, or are persons who
    fall within article&#160;49(2)(a) to (d) (&#147;high net worth
    companies, unincorporated associations, etc.&#148;) of the
    Order;&#160;or
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (c)&#160;to whom it may otherwise lawfully be communicated in
    circumstances in which Section&#160;21(1) of the FSMA does not
    apply.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Without limitation to the other restrictions referred to herein,
    any investment or investment activity to which this offering
    circular relates is available only to, and will be engaged in
    only with, such persons, and persons within the United Kingdom
    who receive this communication (other than persons who fall
    within (2)&#160;above) should not rely or act upon this
    communication.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Germany</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Any offer or solicitation of securities within Germany must be
    in full compliance with the German Securities
</DIV>
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    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">82</FONT></I>
</DIV><!-- END PAGE WIDTH -->
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Prospectus Act (Wertpapierprospektgesetz&#151;WpPG). The offer
    and solicitation of securities to the public in Germany requires
    the publication of a prospectus that has to be filed with and
    approved by the German Federal Financial Services Supervisory
    Authority (Bundesanstalt f&#252;r
    Finanzdienstleistungsaufsicht&#151;BaFin). This prospectus has
    not been and will not be submitted for filing and approval to
    the BaFin and, consequently, will not be published. Therefore,
    this prospectus does not constitute a public offer under the
    German Securities Prospectus Act (Wertpapierprospektgesetz).
    This prospectus and any other document relating to our common
    stock, as well as any information contained therein, must
    therefore not be supplied to the public in Germany or used in
    connection with any offer for subscription of our common stock
    to the public in Germany, any public marketing of our common
    stock or any public solicitation for offers to subscribe for or
    otherwise acquire our common stock. This prospectus and other
    offering materials relating to the offer of our common stock are
    strictly confidential and may not be distributed to any person
    or entity other than the designated recipients hereof.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">France</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    This prospectus has not been prepared in the context of a public
    offering of financial securities in France within the meaning of
    <FONT style="white-space: nowrap">Article&#160;L.411-1</FONT>
    of the French Code Mon&#233;taire et Financier and Title&#160;I
    of Book&#160;II of the R&#232;glement G&#233;n&#233;ral of the
    Autorit&#233; des march&#233;s financiers (the &#147;AMF&#148;)
    and therefore has not been and will not be filed with the AMF
    for prior approval or submitted for clearance to the AMF.
    Consequently, the shares of our common stock may not be,
    directly or indirectly, offered or sold to the public in France
    and offers and sales of the shares of our common stock may only
    be made in France to qualified investors (investisseurs
    qualifi&#233;s) acting for their own, as defined in and in
    accordance with
    <FONT style="white-space: nowrap">Articles&#160;L.411-2</FONT>
    and D.411-1 to D.411-4, D.734-1, D.744-1, D.754-1 and D.764-1 of
    the French Code Mon&#233;taire et Financier. Neither this
    prospectus nor any other offering material may be released,
    issued or distributed to the public in France or used in
    connection with any offer for subscription on sale of the shares
    of our common stock to the public in France. The subsequent
    direct or indirect retransfer of the shares of our common stock
    to the public in France may only be made in compliance with
    <FONT style="white-space: nowrap">Articles&#160;L.411-1,</FONT>
    L.411-2, L.412-1 and L.621-8 through L.621-8-3 of the French
    Code Mon&#233;taire et Financier.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Sweden</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    This is not a prospectus under, and has not been prepared in
    accordance with the prospectus requirements provided for in, the
    Swedish Financial Instruments Trading Act [lagen (1991:980) om
    handel med finasiella instrument] nor any other Swedish
    enactment. Neither the Swedish Financial Supervisory Authority
    nor any other Swedish public body has examined, approved, or
    registered this document.
</DIV>
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    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">83</FONT></I>
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<A name='119'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Material United
    States Federal Tax Considerations<BR>
    for <FONT style="white-space: nowrap">Non-U.S.</FONT>
    Holders of Common Stock</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    This section summarizes certain material U.S.&#160;federal
    income and estate tax considerations relating to the ownership
    and disposition of our common stock. This summary does not
    provide a complete analysis of all potential tax considerations.
    The information provided below is based on existing authorities.
    These authorities may change, possibly with retroactive effect,
    or the Internal Revenue Service, or IRS, might interpret the
    existing authorities differently. In either case, the tax
    considerations of owning or disposing of our common stock could
    differ from those described below. For purposes of this summary,
    a
    <FONT style="white-space: nowrap">&#147;non-U.S.&#160;holder&#148;</FONT>
    is any holder that is not, for U.S.&#160;federal income tax
    purposes, any of the following:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    an individual citizen or resident of the United States;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    a corporation organized under the laws of the United States or
    any state;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    a trust that is (i)&#160;subject to the primary supervision of a
    U.S.&#160;court and the control of one or more U.S.&#160;persons
    or (ii)&#160;has a valid election in effect under applicable
    U.S.&#160;Treasury regulations to be treated as a
    U.S.&#160;person;&#160;or
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    an estate, the income of which is subject to U.S.&#160;federal
    income taxation regardless of source.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    If a partnership or other flow-through entity is the owner of
    our common stock, the tax treatment of a partner in the
    partnership or an owner of the entity will depend upon the
    status of the partner or other owner and the activities of the
    partnership or other entity. Accordingly, partnerships and
    flow-through entities that hold our common stock and partners or
    owners of such partnerships or entities, as applicable, should
    consult their own tax advisors.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    This summary is based upon provisions of the Internal Revenue
    Code of 1986, as amended, or the Code, and regulations, rulings
    and judicial decisions as of the date of this prospectus. Those
    authorities may be changed, perhaps retroactively, so as to
    result in U.S.&#160;federal income and estate tax consequences
    different from those summarized below. In addition, the summary
    does not represent a description of the U.S.&#160;federal income
    and estate tax consequences applicable to you if you are subject
    to special treatment under the U.S.&#160;federal income tax laws
    (including if you are a U.S.&#160;expatriate, &#147;controlled
    foreign corporation,&#148; &#147;passive foreign investment
    company,&#148; bank, insurance company or other financial
    institution, dealer or trader in securities, a person who holds
    our common stock as a position in a hedging transaction,
    straddle or conversion transaction, or other person subject to
    special tax treatment). We cannot assure you that a change in
    law will not alter significantly the tax considerations that we
    describe in this summary. Finally, this summary does not
    describe the effects of any applicable foreign, state, or local
    laws.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B>INVESTORS CONSIDERING THE PURCHASE OF OUR COMMON STOCK SHOULD
    CONSULT THEIR OWN TAX ADVISORS REGARDING THE APPLICATION OF THE
    U.S.&#160;FEDERAL INCOME AND ESTATE TAX LAWS TO THEIR PARTICULAR
    SITUATION AND THE CONSEQUENCES OF FOREIGN, STATE OR LOCAL LAWS
    AND TAX TREATIES.</B>
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Dividends</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Any dividend paid to a
    <FONT style="white-space: nowrap">non-U.S.&#160;holder</FONT>
    in respect of our common stock generally will be subject to
    U.S.&#160;withholding tax at a 30% rate. The withholding tax
    might apply at a reduced rate under the terms of an applicable
    income tax treaty between the United States and the
    <FONT style="white-space: nowrap">non-U.S.&#160;holder&#146;s</FONT>
    country of residence. To obtain a reduced rate of withholding
    under a treaty, a
    <FONT style="white-space: nowrap">non-U.S.&#160;holder</FONT>
    must certify its entitlement to treaty benefits by providing a
    properly completed
    <FONT style="white-space: nowrap">Form&#160;W-8BEN</FONT>
    or other applicable form to us or our paying agent. If the
    <FONT style="white-space: nowrap">non-U.S.&#160;holder</FONT>
    holds the stock through a financial institution or other agent
    acting on the holder&#146;s behalf, the holder will be required
    to provide appropriate documentation to the agent. The
    holder&#146;s agent will then be required to provide
    certification to us or our paying agent, either directly or
    through other intermediaries. For payments made to a foreign
    partnership or other flow-through entity, the certification
    requirements generally apply to the partners or other owners
    rather than to the partnership or other entity, and the
    partnership or other entity must provide the partners&#146; or
    other owners&#146; documentation to us or our paying agent.
    Special rules, described
</DIV>
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    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">84</FONT></I>
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    below, apply if a dividend is effectively connected with a
    U.S.&#160;trade or business conducted by the
    <FONT style="white-space: nowrap">non-U.S.&#160;holder.</FONT>
    A
    <FONT style="white-space: nowrap">non-U.S.&#160;holder</FONT>
    eligible for a reduced rate of U.S.&#160;withholding tax
    pursuant to an income tax treaty generally may obtain a refund
    of any excess amounts withheld from the Internal Revenue Service
    by filing an appropriate claim for refund with the Internal
    Revenue Service.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Sale of Common
    Stock</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="white-space: nowrap">Non-U.S.&#160;holders</FONT>
    generally will not be subject to U.S.&#160;federal income tax on
    any gains realized on the sale, exchange, or other disposition
    of our common stock. This general rule, however, is subject to
    several exceptions. For example, the gain would be subject to
    U.S.&#160;federal income tax if:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the gain is effectively connected with the conduct by the
    <FONT style="white-space: nowrap">non-U.S.&#160;holder</FONT>
    of a U.S.&#160;trade or business or, if a treaty applies, is
    attributable to a permanent establishment of the
    <FONT style="white-space: nowrap">non-U.S.&#160;holder</FONT>
    in the United States, in which case the special rules described
    below apply;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the
    <FONT style="white-space: nowrap">non-U.S.&#160;holder</FONT>
    is an individual who holds our common stock as a capital asset
    and who is present in the United States for 183&#160;days or
    more in the taxable year of the sale, exchange, or other
    disposition, and certain other requirements are met;&#160;or
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the rules of the Foreign Investment in Real Property Tax Act, or
    FIRPTA (described below), treat the gain as effectively
    connected with a U.S.&#160;trade or business.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    A
    <FONT style="white-space: nowrap">non-U.S.&#160;holder</FONT>
    described in the first bullet point immediately above will be
    subject to tax on the net gain derived from the sale under
    regular graduated U.S.&#160;federal income tax rates, and if
    such
    <FONT style="white-space: nowrap">non-U.S.&#160;holder</FONT>
    is a corporation, it may also be subject to the branch profits
    tax generally equal to 30% of its effectively connected earnings
    and profits or at such lower rate as may be specified by an
    applicable income tax treaty. An individual
    <FONT style="white-space: nowrap">non-U.S.&#160;holder</FONT>
    described in the second bullet point immediately above will be
    subject to a flat 30% tax on the gain derived from the sale,
    which may be offset by United States source capital losses, even
    though the individual is not considered a resident of the United
    States.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The FIRPTA rules may apply to a sale, exchange or other
    disposition of our common stock if we are, or were within five
    years before the transaction, a &#147;U.S.&#160;real property
    holding corporation,&#148; or USRPHC. In general, we would be a
    USRPHC if interests in U.S.&#160;real property comprised most of
    our assets. We do not believe that we are a USRPHC or that we
    will become one in the future. Even if we become a USRPHC, if
    our common stock is regularly traded on an established
    securities market, such common stock will be treated as United
    States real property interests only if the
    <FONT style="white-space: nowrap">non-U.S.&#160;holder</FONT>
    actually or constructively held more than five percent of such
    regularly traded common stock.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Dividends or Gain
    Effectively Connected With a U.S. Trade or Business</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    If any dividend on our common stock, or gain from the sale,
    exchange or other disposition of our common stock, is
    effectively connected with a U.S.&#160;trade or business
    conducted by the
    <FONT style="white-space: nowrap">non-U.S.&#160;holder,</FONT>
    then the dividend or gain will be subject to U.S.&#160;federal
    income tax at the regular graduated rates. If the
    <FONT style="white-space: nowrap">non-U.S.&#160;holder</FONT>
    is eligible for the benefits of a tax treaty between the United
    States and the holder&#146;s country of residence, any
    effectively connected dividend or gain would generally be
    subject to U.S.&#160;federal income tax only if it is also
    attributable to a permanent establishment or fixed base
    maintained by the holder in the United States. Payments of
    dividends that are effectively connected with a U.S.&#160;trade
    or business will not be subject to the 30% withholding tax if
    the holder claims exemption from withholding by providing a
    properly completed
    <FONT style="white-space: nowrap">Form&#160;W-8ECI.</FONT>
    If the
    <FONT style="white-space: nowrap">non-U.S.&#160;holder</FONT>
    is a corporation, that portion of its earnings and profits that
    is effectively connected with its U.S.&#160;trade or business
    would generally be subject to a &#147;branch profits tax.&#148;
    The branch profits tax rate is generally 30%, although an
    applicable income tax treaty might provide for a lower rate.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">U.S. Federal
    Estate Tax</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The estates of nonresident alien individuals generally are
    subject to U.S.&#160;federal estate tax on property with a
    U.S.&#160;situs. Because we are a U.S.&#160;corporation, our
    common stock will be U.S.&#160;situs property and therefore will
    be included for U.S.&#160;estate tax purposes in the taxable
    estate of a nonresident alien decedent. The U.S.&#160;federal
    estate
</DIV>
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    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">85</FONT></I>
</DIV><!-- END PAGE WIDTH -->
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    tax liability of the estate of a nonresident alien may be
    affected by a tax treaty between the United States and the
    decedent&#146;s country of residence. The test for whether an
    individual is a resident of the United States for federal estate
    tax purposes differs from the test used for federal income tax
    purposes.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Backup
    Withholding and Information Reporting</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Code and the Treasury regulations require those who make
    specified payments to report the payments to the IRS. Among the
    specified payments are dividends and proceeds paid by brokers to
    their customers. The required information returns enable the IRS
    to determine whether the recipient properly included the
    payments in income. This reporting regime is reinforced by
    &#147;backup withholding&#148; rules. These rules require the
    payors to withhold tax from payments subject to information
    reporting if the recipient fails to provide his taxpayer
    identification number to the payer, furnishes an incorrect
    identification number, or repeatedly fails to report interest or
    dividends on his returns. The withholding tax rate is currently
    28%. The backup withholding rules do not apply to payments to
    corporations, whether domestic or foreign.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Payments to
    <FONT style="white-space: nowrap">non-U.S.&#160;holders</FONT>
    of dividends on our common stock will generally not be subject
    to backup withholding, and payments of proceeds made to
    <FONT style="white-space: nowrap">non-U.S.&#160;holders</FONT>
    by a broker upon a sale of our common stock will not be subject
    to backup withholding, in each case so long as the
    <FONT style="white-space: nowrap">non-U.S.&#160;holder</FONT>
    certifies its nonresident status and the payer does not have
    actual knowledge or reason to know that such holder is a
    U.S.&#160;person as defined under the Code or such holder
    otherwise establishes an exemption. We must report annually to
    the IRS any dividends paid to each
    <FONT style="white-space: nowrap">non-U.S.&#160;holder</FONT>
    and the tax withheld, if any, with respect to such dividends.
    Copies of these reports may be made available to tax authorities
    in the country where the
    <FONT style="white-space: nowrap">non-U.S.&#160;holder</FONT>
    resides.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Any amounts withheld from a payment to a holder of our common
    stock under the backup withholding rules generally may be
    credited against any U.S.&#160;federal income tax liability of
    the holder.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">New Legislation
    Relating to Foreign Accounts</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Newly enacted legislation may impose withholding taxes on
    certain types of payments made to &#147;foreign financial
    institutions&#148; and certain other
    <FONT style="white-space: nowrap">non-U.S.&#160;entities.</FONT>
    Under this legislation, the failure to comply with additional
    certification, information reporting and other specified
    requirements could result in withholding tax being imposed on
    payments of dividends and sales proceeds to foreign
    intermediaries and certain
    <FONT style="white-space: nowrap">non-U.S.&#160;holders.</FONT>
    The legislation imposes a 30% withholding tax on dividends on,
    or gross proceeds from the sale or other disposition of, our
    common stock paid to a foreign financial institution or to a
    foreign non-financial entity, unless (i)&#160;the foreign
    financial institution undertakes certain diligence and reporting
    obligations or (ii)&#160;the foreign non-financial entity either
    certifies it does not have any substantial U.S.&#160;owners or
    furnishes identifying information regarding each substantial
    U.S.&#160;owner. If the payee is a foreign financial
    institution, it must enter into an agreement with the
    U.S.&#160;Treasury requiring, among other things, that it
    undertake to identify accounts held by certain U.S.&#160;persons
    or
    <FONT style="white-space: nowrap">U.S.-owned</FONT>
    foreign entities, annually report certain information about such
    accounts and withhold 30% on payments to account holders whose
    actions prevent it from complying with these reporting and other
    requirements. The legislation applies to payments made after
    December&#160;31, 2012. Prospective investors should consult
    their tax advisors regarding this legislation.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B>THE PRECEDING DISCUSSION OF U.S.&#160;FEDERAL INCOME TAX
    CONSIDERATIONS IS FOR GENERAL INFORMATION ONLY. IT IS NOT TAX
    ADVICE. EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN TAX
    ADVISOR REGARDING THE PARTICULAR U.S.&#160;FEDERAL, STATE, LOCAL
    AND FOREIGN TAX CONSEQUENCES OF PURCHASING, HOLDING, AND
    DISPOSING OF OUR COMMON STOCK, INCLUDING THE CONSEQUENCES OF ANY
    PROPOSED CHANGE IN APPLICABLE LAWS.</B>
</DIV>
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<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">86</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<A name='120'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Legal
    Matters</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The validity of the shares of common stock offered hereby and
    certain other legal matters will be passed upon for us by
    Fredrikson&#160;&#038; Byron, P.A., Minneapolis, Minnesota. The
    underwriters have been represented in connection with this
    offering by Cooley Godward Kronish LLP, Palo Alto, California.
</DIV>

<A name='121'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Experts</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Ernst&#160;&#038; Young LLP, independent registered public
    accounting firm, has audited our financial statements at
    December&#160;31, 2008 and 2009, and for the period from
    May&#160;1, 2007 (date of inception) to December&#160;31, 2007,
    the years ended December&#160;31, 2008 and 2009, and for the
    period from May&#160;1, 2007 (date of inception) to
    December&#160;31, 2009, as set forth in their report. We have
    included our financial statements in the prospectus and
    elsewhere in the registration statement in reliance on
    Ernst&#160;&#038; Young LLP&#146;s report, given on their
    authority as experts in accounting and auditing.
</DIV>

<A name='122'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Where You Can
    Find More Information</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have filed with the SEC a registration statement on
    <FONT style="white-space: nowrap">Form&#160;S-1</FONT>
    under the Securities Act with respect to the shares of common
    stock offered by this prospectus. This prospectus does not
    contain all of the information included in the registration
    statement, portions of which are omitted as permitted by the
    rules and regulations of the SEC. For further information
    pertaining to us and the common stock to be sold in this
    offering, you should refer to the registration statement and its
    exhibits. 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 filed as an
    exhibit to the registration statement or such other document,
    each such statement being qualified in all respects by such
    reference. On the closing of this offering, we will be subject
    to the informational requirements of the Securities Exchange Act
    and will be required to file annual, quarterly and current
    reports, proxy statements and other information with the SEC. We
    anticipate making these documents publicly available, free of
    charge, on our website at www.kipsbaymedical.com as soon as
    reasonably practicable after filing such documents with the SEC.
    The information contained in, or that can be accessed through,
    our website is not part of this prospectus.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    You can read the registration statement and our future filings
    with the SEC over the Internet at the SEC&#146;s website at
    www.sec.gov. You may request copies of the filing, at no cost,
    by telephone at
    <FONT style="white-space: nowrap">(763)&#160;235-3540</FONT>
    or by mail at Kips Bay Medical, Inc., 3405 Annapolis Lane North,
    Suite&#160;200, Minneapolis, MN 55447. You may also read and
    copy any document we file with the SEC at its public reference
    facility at 100&#160;F&#160;Street, N.E., Washington,&#160;D.C.
    20549. Copies of the registration statement may be obtained from
    the SEC at prescribed rates from the public reference room at
    such address. You may obtain information regarding the operation
    of the public reference room by calling
    <FONT style="white-space: nowrap">1-800-SEC-0330.</FONT>
</DIV>
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<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">87</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<A name='123'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Index To
    Financial Statements</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>
<DIV align="left">
<!-- TOC -->
</DIV>

<DIV align="left">
<A name="tocpage"></A>
</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="97%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=quadleft -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=maindata -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=quadright -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="5" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Page</B>
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <A HREF='#300'>Report of Independent Registered Public
    Accounting Firm</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    F-2
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <A HREF='#301'>Statements of Operations</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    F-3
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <A HREF='#302'>Balance Sheets</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    F-4
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <A HREF='#303'>Statements of Stockholders&#146; Equity
    (Deficit)</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    F-5
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <A HREF='#304'>Statements of Cash Flows</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    F-6
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <A HREF='#305'>Notes to the Financial Statements</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    F-7
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="5" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV align="left">
<!-- /TOC -->
</DIV>
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<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">F-1</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<A name='300'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Report of
    Independent Registered Public Accounting Firm</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    To the Board of Directors and Stockholders
</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Kips Bay Medical, Inc.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have audited the accompanying balance sheets of Kips Bay
    Medical, Inc. (a development stage company) as of
    December&#160;31, 2008 and 2009, and the related statements of
    operations, stockholders&#146; equity (deficit), and cash flows
    for each of the three years in the period ended
    December&#160;31, 2009, and for the period from May&#160;1, 2007
    (inception) to December&#160;31, 2009. These financial
    statements are the responsibility of the company&#146;s
    management. Our responsibility is to express an opinion on these
    financial statements based on our audits.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    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. We were not engaged to perform an
    audit of the Company&#146;s internal control over financial
    reporting. Our audits included consideration of internal control
    over financial reporting as a basis for designing audit
    procedures that are appropriate in the circumstances, but not
    for the purpose of expressing an opinion on the effectiveness of
    the Company&#146;s internal control over financial reporting.
    Accordingly, we express no such opinion. An audit also includes
    examining, on a test basis, evidence supporting the amounts and
    disclosures in the financial statements, assessing the
    accounting principles used and significant estimates made by
    management and evaluating the overall financial statement
    presentation. We believe that our audits provide a reasonable
    basis for our opinion.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In our opinion, the financial statements referred to above
    present fairly, in all material respects, the financial position
    of Kips Bay Medical, Inc. at December&#160;31, 2008 and 2009,
    and the results of its operations and its cash flows for each of
    the three years in the period ended December&#160;31, 2009 and
    for the period from May&#160;1, 2007 (inception) to
    December&#160;31, 2009, in conformity with U.S.&#160;generally
    accepted accounting principles.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    As discussed in Note&#160;6 to the financial statements,
    effective January&#160;1, 2009, the Company adopted the
    provisions of the Financial Accounting Standards Board&#146;s
    Accounting Standards Codification Topic
    <FONT style="white-space: nowrap">815-40</FONT> and
    changed its method of accounting for certain instruments indexed
    to the Company&#146;s own stock.
</DIV>

<DIV style="margin-top: 24pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <DIV style="display:inline; text-align:left;">/s/&#160;&#160;Ernst
    &#038; Young, LLP</DIV>
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Minneapolis, Minnesota
</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    April&#160;8, 2010
</DIV>
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">F-2</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">


    <B><FONT style="font-family: Arial, Helvetica">Kips Bay Medical,
    Inc.<BR>
    (A Development Stage Company)<BR>
    <BR>
    <!-- XBRL,op --><A name='301'>Statements of Operations</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>
<!-- XBRL,body -->

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="52%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="7%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="7%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=05 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=05 type=lead -->
    <TD width="7%" align="right">&nbsp;</TD>	<!-- colindex=05 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=05 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="16" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Period from<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Period from<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>May&#160;1, 2007<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>May&#160;1, 2007<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>(Date of<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>(Date of<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Inception) to<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Inception) to<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>December&#160;31,<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Year Ended December&#160;31,</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>December&#160;31,<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2007</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2009</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2009</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Operating expenses:
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Research and development
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    196
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    2,635
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    3,004
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;5,835
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Selling, general and administrative
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    381
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    754
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    779
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,914
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Operating loss
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (577
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (3,389
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (3,783
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (7,749
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Interest income
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    65
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    52
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    17
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    134
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Interest expense
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (164
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (390
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (181
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (735
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Impairment of available for sale securities
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (85
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (85
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Change in fair value of investor stock purchase option
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    610
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    610
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Net loss
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (676
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (3,812
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (3,337
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (7,825
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Basic and diluted net loss per share
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (0.16
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (0.62
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (0.30
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Weighted average shares outstanding&#151;basic and diluted
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    4,106,557
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    6,100,767
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    11,069,342
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="17" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
<TR valign="bottom">
<TD colspan="17" align="right" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 8pt">(In thousands, except share and per
    share amounts)
    </FONT>
</DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>
<!-- /XBRL,op -->
<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    See accompanying notes to financial statements.
</DIV>
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">F-3</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">


    <B><FONT style="font-family: Arial, Helvetica">Kips Bay Medical,
    Inc.<BR>
    (A Development Stage Company)<BR>
    <BR>
    <!-- XBRL,BS --><A name='302'>Balance Sheets</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>
<!-- XBRL,body -->

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="82%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="4%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="5%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="8" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>December&#160;31,</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2009</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD colspan="9" align="center" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <B>ASSETS</B>
</DIV>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Current assets:
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Cash and cash equivalents
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    943
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    2,469
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Short-term investments
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    181
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    948
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Prepaid expenses and other current assets
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    89
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    37
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Total current assets
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,213
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,454
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Property and equipment, net
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    239
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    286
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Total assets
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    1,452
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    3,740
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="line-height: 9pt">
<TD colspan="9">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD colspan="9" align="center" valign="bottom">
    <B>LIABILITIES AND STOCKHOLDERS&#146; EQUITY</B>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Current liabilities:
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Accounts payable
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    23
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    84
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Accrued liabilities
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    159
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    184
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Accrued interest payable
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    424
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Investor stock purchase option liability
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    960
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Total current liabilities
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    606
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,228
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Long-term debt, net
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,862
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Commitments and contingencies (note&#160;5)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Stockholders&#146; equity:
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Undesignated stock, $0.01&#160;par value, 10,000,000&#160;shares
    authorized, no shares issued and outstanding as of
    December&#160;31, 2008 and 2009, respectively
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Common stock, $0.01&#160;par value, 40,000,000&#160;shares
    authorized, 6,300,000 and 12,398,919 issued and outstanding as
    of December&#160;31, 2008 and 2009, respectively
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    63
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    124
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Additional paid-in capital
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,409
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    11,556
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Accumulated other comprehensive income
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    33
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Deficit accumulated during development stage
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (4,488
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (9,201
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Total stockholders&#146; equity (deficit)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (2,016
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,512
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Total liabilities and stockholders&#146; equity
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    1,452
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    3,740
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="9" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
<TR valign="bottom">
<TD colspan="9" align="right" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 8pt">(In thousands except share and per
    share amounts)
    </FONT>
</DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    See accompanying notes to financial statements.
</DIV>
<!-- /XBRL,bs -->
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">F-4</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">


    <B><FONT style="font-family: Arial, Helvetica">Kips Bay Medical,
    Inc.<BR>
    (A Development Stage Company)<BR>
    <BR>
    <!-- XBRL,se --><A name='303'>Statements of Stockholders&#146;
    Equity (Deficit)<BR>
    Period from May&#160;1, 2007 (Date of Inception) to
    December&#160;31, 2009,<BR>
    and for the Years Ended December&#160;31, 2007, 2008 and
    2009</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>
<!-- XBRL,body -->

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 8pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="50%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="6%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="3%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="4%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=05 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=05 type=lead -->
    <TD width="6%" align="right">&nbsp;</TD>	<!-- colindex=05 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=05 type=hang1 -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=06 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=06 type=lead -->
    <TD width="7%" align="right">&nbsp;</TD>	<!-- colindex=06 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=06 type=hang1 -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=07 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=07 type=lead -->
    <TD width="6%" align="right">&nbsp;</TD>	<!-- colindex=07 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=07 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="24" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 7pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Deficit<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 7pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Accumulated<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Accumulated<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 7pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Additional<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>During the<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Other<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Total<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 7pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Common Stock</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Paid-In<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Development<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Comprehensive<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Stockholders&#146;<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 7pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Shares</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Amount</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Capital</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Stage</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Income</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Equity</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Balance at May&#160;1, 2007 (date of inception)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Comprehensive loss
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 17pt">
    Net loss
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (676
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (676
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 17pt">
    Unrealized loss on investments, net
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (13
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (13
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 25pt">
    Comprehensive loss
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (689
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Common stock issued to founders at incorporation, $0.167 per
    share
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    6,000,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    60
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    40
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    100
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Issued stock purchase options in conjunction with issuance of
    secured convertible notes
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    194
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    194
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Effect of beneficial conversion feature on secured convertible
    notes
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    74
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    74
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Stock-based compensation expense
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    16
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    16
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Balance at December&#160;31, 2007
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    6,000,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    60
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    324
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (676
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (13
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (305
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 17pt">
    Comprehensive loss
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 17pt">
    Net loss
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (3,812
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (3,812
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 17pt">
    Unrealized gain on investments, net
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    13
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    13
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 25pt">
    Comprehensive loss
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (3,799
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Common stock issued at $5.83 per share
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    300,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,747
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,750
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Stock-based compensation expense
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    338
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    338
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Balance at December&#160;31, 2008
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    6,300,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    63
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,409
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (4,488
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (2,016
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Comprehensive loss
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 17pt">
    Net loss
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (3,337
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (3,337
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 17pt">
    Unrealized gain on investments, net
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    33
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    33
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 25pt">
    Comprehensive loss
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (3,304
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Cumulative effect adjustment for adoption of FASB ASC
    <FONT style="white-space: nowrap">815-40</FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (194
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (1,376
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (1,570
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Common stock issued at $5.83 per share
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    300,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,747
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,750
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Common stock issued upon conversion of note payable, conversion
    price of $0.625
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    4,800,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    48
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,952
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Common stock issued upon conversion of accumulated interest on
    note payable, conversion price of $0.625
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    347,389
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    4
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    213
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    217
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Common stock issued, $1.00 per share, employee exercise of
    incentive stock option
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Common stock issued, $6.00 per share, under private placement
    offering (net of issuance costs of $29)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    516,241
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    5
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,063
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,068
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Common stock issued, $7.00 per share, under private placement
    offering (net of issuance costs of $11)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    134,289
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    928
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    929
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Stock-based compensation expense
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    437
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    437
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Balance at December&#160;31, 2009
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    12,398,919
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    124
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    11,556
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (9,201
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    33
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    2,512
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="25" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD colspan="25" align="right" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    (In thousands except share amounts)
</DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    See accompanying notes to financial statements.
</DIV>
<!-- /XBRL,se -->
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">F-5</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">


    <B><FONT style="font-family: Arial, Helvetica">Kips Bay Medical,
    Inc.<BR>
    (A Development Stage Company)<BR>
    <BR>
    <!-- XBRL,cf --><A name='304'>Statements of Cash Flows</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>
<!-- XBRL,body -->

<DIV style="margin-top: 8pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="51%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="9%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="6%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="6%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=05 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=05 type=lead -->
    <TD width="9%" align="right">&nbsp;</TD>	<!-- colindex=05 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=05 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="16" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Period from<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Period from<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>May&#160;1, 2007<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>May&#160;1, 2007<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>(Date of<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>(Date of<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Inception)<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Inception)<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>to December&#160;31,</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Year Ended December&#160;31,</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>to December&#160;31,</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2007</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2009</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2009</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <B>Cash flows from operating activities:</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Net loss
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;(676
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;(3,812
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;(3,337
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;(7,825
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Adjustments to reconcile net loss to net cash used in operating
    activities:
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Depreciation expense
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    9
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    49
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    60
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    118
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Stock-based compensation
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    16
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    338
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    437
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    791
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Amortization of discount on secured convertible notes
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    38
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    92
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    138
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    268
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Impairment of available for sale securities
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    85
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    85
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Change in fair value of investor stock purchase option
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (610
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (610
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Changes in operating assets and liabilities:
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 30pt">
    Prepaid expenses and other current assets
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (65
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (24
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    52
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (37
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 30pt">
    Accounts payable
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    17
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    7
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    60
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    84
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 30pt">
    Accrued liabilities
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    30
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    129
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    25
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    184
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 30pt">
    Accrued interest payable
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    126
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    298
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (207
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    217
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Net cash used in operating activities
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (505
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (2,838
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (3,382
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (6,725
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <B>Cash flows from investing activities:</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Net change in short-term investments
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (548
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    282
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (734
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (1,000
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Purchase of property and equipment
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (212
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (86
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (106
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (404
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Net cash provided by (used in) investing activities
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (760
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    196
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (840
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (1,404
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <B>Cash flows from financing activities:</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Proceeds from sale of common stock
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    100
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    100
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Proceeds from issuances of notes payable
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Proceeds from exercise of investor option to purchase common
    stock
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,750
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,750
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,500
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Proceeds from sale of common stock under private placement
    offerings, net of issuance costs
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,997
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,997
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Proceeds from exercise of employee stock options
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Net cash provided by financing activities
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,100
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,750
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    5,748
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    10,598
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Net increase (decrease) in cash and cash equivalents
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,835
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (892
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,526
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,469
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Cash and cash equivalents at beginning of period
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,835
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    943
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Cash and cash equivalents at end of period
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    1,835
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    943
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    2,469
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    2,469
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <B>Supplemental disclosures:</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Interest paid in cash
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    250
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    250
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <B>Supplemental non-cash disclosures:</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Conversion of note payable into common stock
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    3,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    3,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Accrued interest paid by conversion into common stock
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    217
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    217
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="17" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
<TR valign="bottom">
<TD colspan="17" align="right" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 8pt">(In thousands)
    </FONT>
</DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    See accompanying notes to financial statements.
</DIV>
<!-- /XBRL,cf -->
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">F-6</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">


    <B><FONT style="font-family: Arial, Helvetica">Kips Bay Medical,
    Inc.<BR>
    (A Development Stage Company)<BR>
    <BR>
    <!-- XBRL,ns --><A name='305'>Notes To Financial
    Statements</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>
<!-- XBRL,n -->
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: Arial, Helvetica">1.&#160;</FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: Arial, Helvetica">Organization and
    Business</FONT></B>
</TD>
</TR>

</TABLE>
<!-- XBRL,body -->

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Kips Bay Medical, Inc. was incorporated in the state of Delaware
    on May&#160;1, 2007. We are a medical device company focused on
    developing, manufacturing and commercializing our innovative
    external saphenous vein support technology, or eSVS MESH, for
    use in coronary artery bypass grafting, or CABG, surgery. Our
    eSVS MESH is a nitinol mesh sleeve that, when placed over a
    saphenous vein graft during CABG surgery, is designed to improve
    the structural characteristics and long-term performance of the
    vein graft. In CABG procedures, surgeons harvest blood vessels,
    including the internal mammary artery from the chest and the
    saphenous vein from the leg, and attach the harvested vessels to
    bypass, or provide blood flow around, blocked coronary arteries.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our activities since inception have consisted principally of
    acquiring product and technology rights, raising capital,
    performing research and development and conducting preclinical
    and clinical trials. Accordingly, we are considered to be in the
    development stage as of December&#160;31, 2009, as defined by
    the Financial Accounting Standard Board, or FASB, Accounting
    Standard Codification, or ASC, 915. At December&#160;31, 2009,
    we had an accumulated deficit of $9.2&#160;million and we expect
    to incur losses for the foreseeable future. To date, we have
    been funded by private equity and debt financings. Although we
    believe that we will be able to successfully fund our
    operations, there can be no assurance that we will be able to do
    so or that we will ever operate profitably.
</DIV>
<!-- XBRL,n -->
<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: Arial, Helvetica">2.&#160;</FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: Arial, Helvetica">Summary of
    Significant Accounting Policies</FONT></B>
</TD>
</TR>

</TABLE>
<!-- XBRL,body -->
<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Use of
    Estimates</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The preparation of financial statements in conformity with
    accounting principles generally accepted in the United States of
    America requires management to make estimates and assumptions
    that affect the reported amounts and disclosures in the combined
    consolidated financial statements and accompanying notes. Actual
    results could differ from those estimates.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Cash and Cash
    Equivalents</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Cash and cash equivalents consist of cash and money market funds
    with original maturities of three months or less. The carrying
    value of these instruments approximates fair value. We have not
    experienced any losses on our cash and cash equivalents.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Short-term
    Investments</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Short-term investments consist of certificates of deposits and
    mutual fund investments with a maturity of greater than three
    months and less than one year. Short-term investments have been
    classified and accounted for as
    <FONT style="white-space: nowrap">available-for-sale</FONT>
    securities and are reported on the balance sheet at fair value
    with unrealized gains or losses reported as a component of other
    comprehensive income. We continually evaluate our investments in
    marketable securities for impairment due to declines in market
    value considered to be
    <FONT style="white-space: nowrap">other-than-temporary.</FONT>
    That evaluation includes persistent declining stock prices and
    general economic and company-specific evaluations.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Property and
    Equipment</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Property and equipment is stated at cost less accumulated
    depreciation. Depreciation is computed based upon the estimated
    useful lives of the respective assets, or the lesser of the
    estimated useful life or the remaining life of the underlying
    facility lease for leasehold improvements, ranging from three to
    seven years, and is recorded using the straight-line method.
    Repairs and maintenance costs are expensed as incurred.
</DIV>
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">F-7</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL -->
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Kips Bay Medical,
    Inc.<BR>
    (A Development Stage Company)<BR>
    <BR>
    Notes To Financial Statements&#151;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>
<!-- XBRL Pagebreak End -->

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Impairment of
    Long-Lived Assets</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In accordance with FASB ASC 360, <I>Property, Plant and
    Equipment</I>, long-lived assets, such as property and
    equipment, are reviewed for impairment whenever events or
    changes in circumstances indicate that the carrying amount of an
    asset may not be recoverable. Recoverability of assets to be
    held and used is measured by a comparison of the carrying amount
    of an asset to estimated undiscounted future cash flows expected
    to be generated by the asset. If the carrying amount of an asset
    exceeds its estimated future cash flows, then an impairment
    charge is recognized by the amount by which the carrying amount
    of the asset exceeds the fair value of the asset. As of
    December&#160;31, 2008 and 2009, management believes that no
    modification of the remaining useful lives or write-down of
    long-lived assets is required.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Fair Value of
    Financial Instruments</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We adopted the provisions of FASB ASC 820, <I>Fair Value
    Measurements and Disclosures</I>, effective January&#160;1,
    2008. FASB ASC 820 defines fair value, establishes a framework
    for measuring fair value under generally accepted accounting
    principles, or GAAP, and enhances disclosures about fair value
    measurements.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Fair value is defined as the price that would be received to
    sell an asset or paid to transfer a liability in an orderly
    transaction between market participants at the measurement date.
    Valuation techniques used to measure fair value, as required by
    FASB ASC 820, must maximize the use of observable inputs and
    minimize the use of unobservable inputs.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The standard describes a fair value hierarchy based on three
    levels of inputs, of which the first two are considered
    observable and the last unobservable, that may be used to
    measure fair value. Our assessment of the significance of a
    particular input to the fair value measurements requires
    judgment, and may affect the valuation of the assets and
    liabilities being measured and their placement within the fair
    value hierarchy. The three levels of input are:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Level&#160;1&#151;Quoted prices in active markets for identical
    assets or liabilities.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Level&#160;2&#151;Inputs other than Level&#160;1 that are
    observable, either directly or indirectly, such as quoted prices
    for similar assets or liabilities; quoted prices in markets that
    are not active; or other inputs that are observable or can be
    corroborated by observable market data for substantially the
    full term of the assets or liabilities.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Level&#160;3&#151;Unobservable inputs that are supported by
    little or no market activity and that are significant to the
    fair value of the assets or liabilities.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The adoption of this statement did not have a material impact on
    our results of operations and financial condition.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Following is a description of our valuation methodologies for
    assets and liabilities measured at fair value.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Where quoted prices are available in an active market, fair
    value is based upon quoted market prices and is classified in
    level&#160;1 of the fair value hierarchy. If quoted market
    prices are not available, fair value is based upon observable
    inputs such as quoted prices for similar assets or liabilities,
    quoted prices in markets that are not active, or other inputs
    that are observable or can be corroborated by observable market
    data, and the assets or liabilities are classified in
    level&#160;2 of the valuation hierarchy. When quoted prices and
    observable inputs are unavailable, fair values are based on
    internally developed cash flow models and are classified in
    level&#160;3 of the valuation hierarchy. The internally
    developed cash flow models primarily use, as inputs, estimates
    for interest rates and discount rates, including yields of
    comparable traded instruments adjusted for illiquidity and other
    risk factors, amount of cash flows and expected holding periods
    of the assets. These inputs reflect our own assumptions about
    the assumptions market participants would use in pricing the
    assets, including assumptions about risk developed based on the
    best information available in the circumstances.
</DIV>
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">F-8</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL -->
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Kips Bay Medical,
    Inc.<BR>
    (A Development Stage Company)<BR>
    <BR>
    Notes To Financial Statements&#151;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>
<!-- XBRL Pagebreak End -->



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Other financial instruments, including accounts payable and
    accrued liabilities, are carried at cost, which we believe
    approximates fair value because of the short-term maturity of
    these instruments.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Research and
    Development Expenses</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Research and development costs are expensed as incurred and
    include the costs to design, develop, test, deploy and enhance
    our eSVS MESH. It also includes costs related to the execution
    of clinical trials and to obtain regulatory approval for our
    eSVS MESH. We expense amounts paid to obtain patents or acquire
    licenses as the ultimate recoverability of the amounts paid is
    uncertain.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We charge research and development costs, including clinical
    trial costs, to expense when incurred, consistent with the
    guidance of FASB ASC 730, <I>Research and Development</I>.
    Clinical trial costs are a significant component of research and
    development expenses. All of our clinical trials are performed
    at clinical trial sites and are administered by contract
    research organizations, or CROs. Costs of setting up clinical
    trial sites are accrued immediately. Expenses related to
    clinical trials generally are accrued based on contracted
    amounts and the achievement of milestones, such as number of
    patients enrolled. We monitor levels of performance under each
    significant contract, including the extent of patient enrollment
    and other activities through communications with the CROs, and
    adjust the estimates, if required, on a quarterly basis so that
    clinical expenses reflect the actual effort expended by each CRO.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    All material CRO contracts are terminable by us upon written
    notice and we are generally only liable for actual effort
    expended by the CROs and certain non-cancelable expenses
    incurred at any point of termination.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Comprehensive
    Income/Loss</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Comprehensive income/loss consists of other comprehensive income
    or losses and net loss. Other comprehensive income or losses
    include certain changes in equity that are excluded from net
    loss. Specifically, we include unrealized gains and losses on
    <FONT style="white-space: nowrap">available-for-sale</FONT>
    securities in other comprehensive income/loss. Comprehensive
    loss for each period presented is set forth in the Statements of
    Stockholders&#146; Equity (Deficit).
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Income
    Taxes</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Income taxes are accounted for under the asset and liability
    method. Deferred tax assets and liabilities are recognized for
    the future tax consequences attributable to differences between
    the financial statement carrying amounts of existing assets and
    liabilities and their respective tax bases and operating loss
    and tax credit carry-forwards. Deferred tax assets and
    liabilities are measured using enacted tax rates expected to
    apply to taxable income in the years in which those temporary
    differences are expected to be recovered or settled. The effect
    on deferred tax assets and liabilities of a change in tax rates
    is recognized in income in the period that includes the
    enactment date. In light of our cumulative losses, we believe
    that it is more likely than not that our net deferred tax asset
    will not be realized. Accordingly, a full valuation allowance
    has been recorded against our net deferred tax assets.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Stock-Based
    Compensation</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Stock-based incentive awards are accounted for under the
    provisions of FASB ASC 718, <I>Compensation &#151;&#160;Stock
    Compensation</I>, which requires companies to measure and
    recognize the cost of employee and non-employee services
    received in exchange for awards of equity instruments based on
    the grant date fair value of those awards. Compensation cost is
    recognized ratably using the straight-line attribution method
    over the expected vesting period, which is considered to be the
    requisite service period. In addition, we are required to
    estimate the amount of expected forfeitures when calculating the
    compensation costs, instead of accounting for forfeitures as
    incurred.
</DIV>
<!-- XBRL Paragraph Pagebreak -->
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">F-9</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL -->
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Kips Bay Medical,
    Inc.<BR>
    (A Development Stage Company)<BR>
    <BR>
    Notes To Financial Statements&#151;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>
<!-- XBRL Pagebreak End -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    All of our options previously awarded were classified as equity
    instruments and continue to maintain their equity classification.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The fair value of options is estimated at the date of grant
    using the Black-Scholes option pricing model with the
    assumptions listed in note&#160;7. Risk free interest rates are
    based upon U.S.&#160;Treasury rates appropriate for the expected
    term. Expected volatility and forfeiture rates are based on the
    volatility rates of a set of guideline companies, which consist
    of public and recently public medical technology companies. The
    assumed dividend yield is zero, as we do not expect to declare
    any dividends in the foreseeable future. The expected term is
    determined using the simplified method allowed by SEC Staff
    Accounting Bulletin&#160;No.&#160;110. The fair value of the
    common stock underlying the stock options has been determined by
    our Board of Directors at each award grant date based upon a
    variety of factors, primarily the most recent purchase prices of
    our common stock issued to third parties in arms-length
    transactions, but also the progress of our product development,
    the progress of our preclinical and clinical testing, and the
    risks associated with our business plan.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Stock-based compensation expense in our statements of operations
    is summarized as follows:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="49%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="12%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="4%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="4%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=05 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=05 type=lead -->
    <TD width="12%" align="right">&nbsp;</TD>	<!-- colindex=05 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=05 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="16" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Period from May&#160;1,<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Period from May&#160;1,<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>2007 (Date of<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>2007 (Date of<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Inception) to<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>December&#160;31,</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Inception) to<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>December&#160;31, 2007</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2009</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>December&#160;31, 2009</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Research and development
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;&#160;&#160;14
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;298
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;390
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;702
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Sales, general and administrative
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    40
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    47
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    89
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Total stock-based compensation
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    16
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    338
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    437
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    791
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="17" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
<TR valign="bottom">
<TD colspan="17" align="right" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 8pt">(In thousands)
    </FONT>
</DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Net Loss Per
    Share</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We compute net loss per share in accordance with FASB ASC 260,
    <I>Earnings Per Share</I>, under which basic net loss
    attributable to common stockholders, on a per share basis, is
    computed by dividing income available to common stockholders
    (the numerator) by the weighted-average number of common shares
    outstanding (the denominator) during the period. Shares issued
    during the period and shares reacquired during the period are
    weighted for the portion of the period that they were
    outstanding. The computation of diluted earnings per share, or
    EPS, is similar to the computation of basic EPS except that the
    denominator is increased to include the number of additional
    common shares that would have been outstanding if the dilutive
    potential common shares had been issued. In addition, in
    computing the dilutive effect of convertible securities, the
    numerator is adjusted to add back the after-tax amount of
    interest recognized in the period associated with any
    convertible debt. Diluted EPS is the same as basic EPS due to
    common equivalent shares being excluded from the calculation, as
    their effect is anti-dilutive.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The following table summarizes our calculation of net loss per
    common share:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="59%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="12%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="7%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="12" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Period from May&#160;1,<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>2007 (Date of<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Inception) to<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>December&#160;31,</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>December&#160;31, 2007</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2009</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Net loss
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (676
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (3,812
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (3,337
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Weighted average shares outstanding&#151;basic and diluted
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    4,106,557
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    6,100,767
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    11,069,342
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Net loss per share&#151;basic and diluted
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (0.16
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (0.62
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (0.30
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="13" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
<TR valign="bottom">
<TD colspan="13" align="right" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 8pt">(In thousands, except per share
    amounts)
    </FONT>
</DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">F-10</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL -->
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Kips Bay Medical,
    Inc.<BR>
    (A Development Stage Company)<BR>
    <BR>
    Notes To Financial Statements&#151;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>
<!-- XBRL Pagebreak End -->



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Outstanding potential common shares not included in diluted net
    loss per share attributable to common stockholders calculations
    included:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="65%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="6%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="6%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="3%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="3%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="3%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="3%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="13" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Period from May&#160;1,<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>2007 (Date of<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Inception) to<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="7" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>December&#160;31,</B>
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>December&#160;31, 2007</B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2009</B>
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Employee and non-employee stock options
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    295,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    531,750
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    598,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Common shares issuable for conversion of debt (See note&#160;6)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    4,800,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    4,800,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Common shares issuable under investor option purchase agreements
    (See note&#160;6)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,200,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    900,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    600,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="13" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Fiscal
    Year</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We operate on a manufacturing calendar with our fiscal year
    always ending on December&#160;31. Each quarter is
    13&#160;weeks, consisting of one five-week and two four-week
    periods.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">New Accounting
    Pronouncements</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In June 2009, the FASB issued FASB ASC 105, <I>Generally
    Accepted Accounting Principles</I>, which establishes the FASB
    Accounting Standards Codification as the sole source of
    authoritative generally accepted accounting principles. Pursuant
    to the provisions of FASB ASC 105, we have reflected references
    to GAAP in our financial statements issued for the period ended
    December&#160;31, 2009. The adoption of FASB ASC 105 did not
    impact our financial position or results of operations.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In June 2008, the FASB issued FASB ASC
    <FONT style="white-space: nowrap">815-40,</FONT>
    <I>Derivatives and Hedging</I>, which provides guidance on how
    to determine if certain instruments (or embedded features) are
    considered indexed to a company&#146;s own stock, including
    instruments similar to warrants to purchase the company&#146;s
    stock. FASB ASC
    <FONT style="white-space: nowrap">815-40</FONT>
    clarifies the determination of whether equity-linked instruments
    (or embedded features), such as our convertible notes or options
    to purchase our common stock, are considered indexed to our own
    stock, which would qualify as a scope exception and therefore be
    exempt from the application of FASB ASC 815. As a result of the
    adoption of the provisions of FASB ASC
    <FONT style="white-space: nowrap">815-40</FONT> on
    January&#160;1, 2009, certain instruments previously reported as
    equity are now accounted for as derivative instruments. ASC
    <FONT style="white-space: nowrap">815-40</FONT> was
    initially applied by recording a cumulative effect adjustment to
    retained earnings upon adoption. The impact of adopting this
    guidance is described in note&#160;6.
</DIV>
<!-- XBRL,n -->
<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: Arial, Helvetica">3.&#160;</FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: Arial, Helvetica">Short-Term
    Investments and Impairment</FONT></B>
</TD>
</TR>

</TABLE>
<!-- XBRL,body -->

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Short-term investments include a mutual fund investment and
    certificates of deposit, which are generally measured using
    quoted prices in active markets and are classified as
    Level&#160;1.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Due to the short maturities of our investments in certificates
    of deposits, their amortized cost approximates fair value.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    As of December&#160;31, 2008 we concluded that the value of our
    mutual fund investment was impaired and that this impairment was
    other than temporary. We recorded an other than temporary
    impairment charge of $85,000, which resulted in a new adjusted
    cost basis for this investment. We had no other unrealized gains
    or losses as of December&#160;31, 2008. For the year ended
    December&#160;31, 2009, unrealized gains of $33,000 were
    reported in other comprehensive income as the market value
    exceeded the cost of our mutual fund investment.
</DIV>
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">F-11</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL -->
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Kips Bay Medical,
    Inc.<BR>
    (A Development Stage Company)<BR>
    <BR>
    Notes To Financial Statements&#151;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>
<!-- XBRL Pagebreak End -->
<!-- XBRL,n -->
<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: Arial, Helvetica">4.&#160;</FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: Arial, Helvetica">Property and
    Equipment</FONT></B>
</TD>
</TR>

</TABLE>
<!-- XBRL,body -->

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    At December&#160;31, 2008 and 2009, property and equipment
    consist of the following:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="86%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="2%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="3%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="8" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>December&#160;31,</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2009</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Furniture and fixtures
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;33
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;36
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Machinery, equipment and tooling
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    154
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    254
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Computers and software
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    62
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    66
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Leasehold improvements
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    48
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    48
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Accumulated depreciation
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (58
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (118
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Property and equipment, net
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    239
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    286
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="9" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD colspan="9" align="right" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 8pt">(In thousands)
    </FONT>
</DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Depreciation expense for the years ended December&#160;31, 2007,
    2008 and 2009 was $9,000, $49,000 and $60,000, respectively.
</DIV>
<!-- XBRL,n -->
<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: Arial, Helvetica">5.&#160;</FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: Arial, Helvetica">Commitments and
    Contingencies</FONT></B>
</TD>
</TR>

</TABLE>
<!-- XBRL,body -->
<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Leases</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We entered into an operating lease agreement for our facility.
    The term of this lease runs from October&#160;1, 2007 through
    September&#160;30, 2010. The monthly base rent amount is fixed
    over the entire term of the lease. Terms of this lease
    arrangement include market rate renewal options, payment of
    executory costs such as real estate taxes, insurance and common
    area maintenance. We are currently in negotiations with our
    landlord to renew this lease. We also lease certain other office
    equipment under non-cancelable operating lease arrangements
    which are not recognized on our balance sheets.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Annual future minimum lease obligations under our operating
    lease agreements as of December&#160;31, 2009 are as follows:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="94%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="2%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    2010
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;46
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    2011
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    2012
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Total
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    52
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="5" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD colspan="5" align="right" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 8pt">(In thousands)
    </FONT>
</DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Rent expense was $14,000, $57,000 and $57,000 for the years
    ended December&#160;31, 2007, 2008 and 2009, respectively, and
    $128,000 for the period from May&#160;1, 2007 (date of
    inception) to December&#160;31, 2009.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Royalty
    Payments</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The core intellectual property relating to our eSVS MESH,
    including five patent applications pending in the United States
    and nine patent applications pending in countries outside the
    United States, was acquired from Medtronic, Inc. pursuant to an
    Assignment and License Agreement dated October&#160;9, 2007. As
    consideration for the assignment of such intellectual property,
    we have agreed to pay Medtronic an aggregate of up to
    $15.0&#160;million upon the achievement of certain sales
    milestones and a royalty of 4% on sales of our eSVS MESH. The
    royalty will terminate upon the earlier of the expiration of all
    of the patents and patent applications, or when the aggregate
    royalties paid reaches $100.0&#160;million.
</DIV>
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">F-12</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL -->
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Kips Bay Medical,
    Inc.<BR>
    (A Development Stage Company)<BR>
    <BR>
    Notes To Financial Statements&#151;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>
<!-- XBRL Pagebreak End -->

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Legal
    Proceedings</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We are not currently engaged in any litigation.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Employment
    Agreements</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We entered into an employment agreement with Manny
    Villafa&#241;a, our founder, Chief Executive Officer and sole
    director, on July&#160;19, 2007, which provides for a base
    salary and discretionary bonuses as determined by our Board of
    Directors. Mr.&#160;Villafa&#241;a is also entitled to
    participate in any employee benefit plans we sponsor. If we
    terminate Mr.&#160;Villafa&#241;a&#146;s employment without
    cause, he is entitled to his base salary for the entire term of
    the employment agreement, which expires on July&#160;1, 2012.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Mr.&#160;Villafa&#241;a&#146;s employment agreement contains
    usual and customary provisions relating to confidential
    information and assignment of inventions to us. In addition, the
    agreement contains certain provisions concerning
    Mr.&#160;Villafa&#241;a&#146;s post-employment activities.
    Pursuant to the agreement, he has agreed not to compete with us
    for a period of two years after the termination of his
    employment. Such two-year period will automatically be extended
    by one year increments, up to a total of five years, unless
    terminated by us. As consideration for this non-competition
    provision, we will make a monthly payment to
    Mr.&#160;Villafa&#241;a equal to one twelfth of his base salary
    at the time of termination, adjusted to the Consumer Price
    Index, or CPI, beginning with the first month after termination
    of employment and continuing until the non-competition provision
    expires. Mr.&#160;Villafa&#241;a will also be entitled to
    continue his participation in our medical benefits plan for the
    term of the non-competition provision, provided he continues to
    pay the employee portion of the premium. Following the
    termination of his employment with us, Mr.&#160;Villafa&#241;a
    has also agreed to consult on non-confidential matters at the
    request of our Board of Directors.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We also entered into a change in control agreement with
    Mr.&#160;Villafa&#241;a on September&#160;12, 2008. Under the
    terms of this agreement, if, within 24&#160;months of a change
    in control, Mr.&#160;Villafa&#241;a&#146;s employment is
    terminated by us other than for cause, or if he resigns for good
    reason, Mr.&#160;Villafa&#241;a will be entitled to a prorated
    portion of any annual incentive bonus for the fiscal year in
    which the termination occurs and a severance benefit equal to
    three years of his base salary. The change in control agreement
    will expire on September&#160;12, 2011, but will be
    automatically extended by one-year increments thereafter unless
    either party provides written notice to the other of the intent
    not to extend the agreement.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have entered into employment agreements with certain key
    employees providing for an annual salary and such benefits in
    the future as may be approved by the Board of Directors. We have
    also entered into change of control agreements with employees
    which provide that if the employee is terminated for a reason
    other than cause, or resigns for good reason, upon a merger,
    acquisition, sale of substantially all of our assets, or
    liquidation, the employee will receive severance payments equal
    to his or her monthly salary for 12 to 36&#160;months.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Indemnification
    Agreements</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company, as permitted under Delaware law and in accordance
    with its Bylaws, indemnifies its officers and directors for
    certain events or occurrences, subject to certain limits, while
    the officer or director is or was serving at the Company&#146;s
    request in such capacity. The term of the indemnification period
    is for the officer&#146;s or director&#146;s lifetime. The
    Company may terminate the indemnification agreements with its
    officers and directors upon 90&#160;days written notice, but
    termination will not affect claims for indemnification relating
    to events occurring prior to the effective date of termination.
    The maximum amount of potential future indemnification is
    unlimited; however, the Company has a director and officer
    insurance policy that limits its exposure and may enable it to
    recover a portion of any future amounts paid. The Company
    believes the fair value of these indemnification agreements is
    minimal. Accordingly, the Company has not recorded any
    liabilities for these agreements as of December&#160;31, 2009.
</DIV>
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">F-13</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL -->
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Kips Bay Medical,
    Inc.<BR>
    (A Development Stage Company)<BR>
    <BR>
    Notes To Financial Statements&#151;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>
<!-- XBRL Pagebreak End -->
<!-- XBRL,n -->
<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: Arial, Helvetica">6.&#160;</FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: Arial, Helvetica">Convertible
    Promissory Notes and Equity Financing</FONT></B>
</TD>
</TR>

</TABLE>
<!-- XBRL,body -->
<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Investment
    Agreement with Kips Bay Investments, LLC</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On July&#160;19, 2007, we executed an Investment Agreement under
    which we issued two secured convertible notes to Kips Bay
    Investments, LLC, or KBI. Pursuant to the Investment Agreement,
    which was executed prior to KBI becoming a 5% or more beneficial
    holder of our common stock, KBI agreed to sell us all right and
    title to certain intellectual property assets for the sum of
    $100,000 in the form of a first secured convertible note, and to
    loan us the sum of $2.9&#160;million in exchange for a second
    secured convertible note, or collectively, the Notes. The Notes
    accrued interest at a rate of nine percent per annum, and were
    convertible into an aggregate of 4,800,000&#160;shares of our
    common stock for repayment of principal, representing a
    conversion price of $0.625 per share, and conversion of accrued
    interest also at $0.625 per share. Pursuant to the Investment
    Agreement, we also granted KBI two separate options to purchase
    common stock, each for the right to purchase up to
    600,000&#160;shares of our common stock for the sum of
    $3.5&#160;million at such time as we have achieved certain
    defined milestones. The Investment Agreement also provides
    certain registration rights to KBI. The relative fair value of
    the stock purchase options and the beneficial conversion feature
    on the Notes were recorded as discounts on the Notes and were
    amortized over the term of the Notes using the effective
    interest method.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In connection with the execution of the Notes, we entered into a
    Loan and Security Agreement with KBI, whereby we granted a
    security interest in all of our existing and to-be-acquired
    property and proceeds therefrom, including all intellectual
    property assets transferred by KBI to us pursuant to the first
    secured convertible note. The Loan and Security Agreement
    terminated upon conversion of the Notes.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In April 2008, we achieved the first defined milestone and KBI
    subsequently exercised its first stock purchase option under the
    Investment Agreement, purchasing 600,000&#160;shares of our
    common stock for a purchase price of $3.5&#160;million.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In February 2009, KBI elected to convert the entire amount of
    principal and $217,000 of $467,000 of accrued interest on the
    Notes into our common stock, and we subsequently issued
    5,147,389&#160;shares of our common stock to KBI. The remaining
    accrued interest of $250,000 was paid in cash concurrent with
    KBI&#146;s conversion election.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We account for derivative instruments in accordance with FASB
    ASC 815, <I>Derivatives and Hedging</I>, which provides
    accounting and reporting standards for derivative instruments,
    including certain derivative instruments embedded in other
    contracts. We do not use derivative instruments for hedging of
    market risks or for trading or speculative purposes. Effective
    January&#160;1, 2009, we were required to adopt FASB ASC
    <FONT style="white-space: nowrap">815-40,</FONT>
    (formerly EITF Issue
    <FONT style="white-space: nowrap">No.&#160;07-5,</FONT>
    <I>Determining Whether an Instrument (or Embedded Feature) is
    Indexed to an Entity&#146;s Own Stock</I>), which clarified the
    determination of whether equity-linked instruments (or embedded
    features), such as the options to purchase our common stock
    granted to KBI, are considered indexed to our own stock, which
    would qualify as a scope exception under FASB ASC 815. As a
    result of adopting FASB ASC
    <FONT style="white-space: nowrap">815-40,</FONT> the
    second option to purchase our common stock granted to KBI is
    considered a derivative liability and must be measured at fair
    value. As noted above, the first option was exercised in 2008
    and was not outstanding at the effective date for FASB ASC
    <FONT style="white-space: nowrap">815-40.</FONT>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The estimated fair value of our investor stock purchase option
    liability is recorded as a current liability on our balance
    sheets. Changes in the estimated fair values of this liability
    are recorded in our statements of operations.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On January&#160;1, 2009, the date of adoption, we estimated the
    fair value of the second option to be $1.6&#160;million and this
    amount was recorded as a cumulative effect adjustment on
    January&#160;1, 2009, which increased our deficit accumulated
    during development stage by $1.4&#160;million. The effect of
    marking this liability to &#147;market&#148; at
    December&#160;31, 2009 resulted in a net decrease in the
    estimated fair values of this liability of $610,000, resulting
    in an estimated fair value of this liability of $960,000.
</DIV>
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">F-14</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL -->
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Kips Bay Medical,
    Inc.<BR>
    (A Development Stage Company)<BR>
    <BR>
    Notes To Financial Statements&#151;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>
<!-- XBRL Pagebreak End -->



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In February 2010, KBI exercised its second stock purchase option
    under the Investment Agreement, the second milestone having
    previously been achieved by us, purchasing 600,000&#160;shares
    of our common stock for a purchase price of $3.5&#160;million.
    At that time we also agreed to convert the $250,000 of interest
    on the Notes previously paid in cash to common stock, and
    pursuant to such conversion, KBI repaid the $250,000 to us and
    we subsequently issued 400,000&#160;shares of our common stock
    to KBI. The exercise of this stock purchase option was made
    pursuant to a Stock Purchase Agreement between KBI and us.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Common Stock
    Offerings</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In March 2009, we commenced a private offering of a minimum of
    500,000&#160;shares of our common stock and up to a maximum of
    1,666,667&#160;shares of our common stock to certain accredited
    investors at an offering price of $6.00 per share. We sold an
    aggregate of 516,241&#160;shares of common stock in the private
    offering, which was completed in August 2009. KBI purchased
    41,667&#160;shares of our common stock in this private offering.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In October 2009, we commenced a private offering of
    714,286&#160;shares of our common stock to certain accredited
    investors at an offering price of $7.00 per share. As of
    December&#160;31, 2009, we had sold an aggregate of
    134,289&#160;shares of common stock in the private offering.
    Subsequent to December&#160;31, 2009, we sold an additional
    182,872&#160;shares of common stock for an aggregate total of
    317,161&#160;shares. This offering was completed in
    February&#160;2010.
</DIV>
<!-- XBRL,n -->
<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: Arial, Helvetica">7.&#160;</FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: Arial, Helvetica">Stock-Based
    Compensation</FONT></B>
</TD>
</TR>

</TABLE>
<!-- XBRL,body -->
<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">2007 Long-Term
    Incentive Plan</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our 2007 Long-Term Incentive Plan, or the Plan, was adopted by
    the Board of Directors in July 2007. The Plan permits the
    granting of incentive and non-statutory stock options,
    restricted stock, stock appreciation rights, performance units,
    performance shares and other stock awards to eligible employee,
    directors and consultants. We grant options to purchase shares
    of common stock under the Plan at no less than the fair market
    value of the underlying common stock as of the date of grant.
    Options granted under the Plan have a maximum term of ten years
    and generally vest over four years at the rate of 25% of total
    shares underlying the option. Under the Plan, a total of
    2,000,000&#160;shares of common stock were initially reserved
    for issuance.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    A summary of option activity is as follows:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="66%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="7%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="7%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="6%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="12" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Weighted<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Shares Under<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Average<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Available<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Option</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Exercise Price</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>For Grant</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Options outstanding at May&#160;1, 2007 (date of inception)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;&#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,000,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Granted
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    295,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1.00
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (295,000
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Options outstanding at December&#160;31, 2007
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    295,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1.00
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,705,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Granted
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    253,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    4.65
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (253,000
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Exercised
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Cancelled
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (16,250
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2.21
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    16,250
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Options outstanding at December&#160;31, 2008
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    531,750
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1.72
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,468,250
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Granted
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    70,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    5.93
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (70,000
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Exercised
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (1,000
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1.00
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Cancelled
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (2,750
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1.00
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,750
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Options outstanding at December&#160;31, 2009
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    598,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3.08
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,401,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="13" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">F-15</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL -->
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Kips Bay Medical,
    Inc.<BR>
    (A Development Stage Company)<BR>
    <BR>
    Notes To Financial Statements&#151;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>
<!-- XBRL Pagebreak End -->



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The grant date total fair value of employee options vested
    during the years ended December&#160;31, 2007, 2008 and 2009 was
    $0, $27,000 and $67,000, respectively. The total intrinsic value
    of options exercised during the years ended December&#160;31,
    2007, 2008 and 2009 was $0, $0 and $5,000, respectively. Total
    proceeds received for options exercised during years ended
    December&#160;31, 2008 and 2009 was $0 and $1,000, respectively.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Information about stock options outstanding, vested and expected
    to vest as of December&#160;31, 2009, is as follows:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=01 type=lead -->
    <TD width="15%" align="right">&nbsp;</TD>	<!-- colindex=01 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=01 type=hang1 -->
    <TD width="13%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="5%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="13%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="6%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="13%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="7%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
    <TD width="13%">&nbsp;</TD>	<!-- colindex=05 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=05 type=lead -->
    <TD width="5%" align="right">&nbsp;</TD>	<!-- colindex=05 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=05 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="18" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD colspan="10" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Outstanding, Vested and Expected to Vest</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Options Vested</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD colspan="2" nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Weighted<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD colspan="2" nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Average<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD colspan="2" nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Remaining<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD colspan="2" nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Contractual<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Weighted<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD colspan="2" nowrap align="left" valign="bottom">
    <B>Per Share<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Life<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Average<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Options<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD colspan="2" nowrap align="left" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Exercise Price</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Shares</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>(Years)</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Exercise Price</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Exercisable</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;1.00
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    334,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    7.80
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;1.00
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    166,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2.00
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    10,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    8.19
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2.00
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,500
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    5.83
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    214,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    8.81
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    5.83
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    84,750
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    6.00
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    40,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    9.68
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    6.00
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    598,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    8.30
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2.63
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    253,250
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="19" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Stock-Based
    Compensation Expense</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Total employee stock-based compensation expense recognized under
    FASB ASC 718 was as follows:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="47%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="12%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="5%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="5%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=05 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=05 type=lead -->
    <TD width="12%" align="right">&nbsp;</TD>	<!-- colindex=05 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=05 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="16" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Period from May&#160;1,<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Period from May&#160;1,<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>2007 (Date of<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>2007 (Date of<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Inception) to<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>December&#160;31,</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Inception) to<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>December&#160;31, 2007</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2009</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>December&#160;31, 2009</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Research and development
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;5
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;37
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;83
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;125
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Selling, general and administrative
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    9
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    12
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    23
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Total stock-based compensation
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    7
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    46
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    95
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    148
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="17" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
<TR valign="bottom">
<TD colspan="17" align="right" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 8pt">(In thousands)
    </FONT>
</DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    As of December&#160;31, 2007, 2008 and 2009, total compensation
    expense related to unvested employee stock options not yet
    recognized was $86,000, $199,000 and $297,000, respectively,
    which is expected to be allocated to expenses over a
    weighted-average period of 3.68, 2.88 and 2.22&#160;years,
    respectively.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The assumptions used in the Black-Scholes option-pricing model
    for the years ended December&#160;31, 2007, 2008 and 2009, and
    for the period from May&#160;1, 2007 (Date of Inception) to
    December&#160;31, 2009, are as follows:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="37%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="7%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="7%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="6%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="6%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="4%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="4%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=05 type=gutter -->
    <TD width="7%" align="right">&nbsp;</TD>	<!-- colindex=05 type=lead -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=05 type=body -->
    <TD width="7%" align="left">&nbsp;</TD>	<!-- colindex=05 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="17" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Period from May&#160;1,<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Period from May&#160;1,<BR>
    </B>
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>2007<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>2007<BR>
    </B>
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>(Date of Inception) to<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>(Date of Inception) to<BR>
    </B>
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>December&#160;31,<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="7" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>December&#160;31,</B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>December&#160;31,<BR>
    </B>
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2007</B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2009</B>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2009</B>
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Risk free interest rate
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3.39-4.32
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2.66-3.58
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1.75-2.80
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1.75-4.32
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Dividend yield
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    0
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    0
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    0
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    0
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Expected volatility
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    52
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    53
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    48
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    48-53
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Expected term
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    5.75-6.25&#160;years
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    5.75-6.25&#160;years
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    6.25&#160;years
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    5.75-6.25&#160;years
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Weighted average grant date fair value
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    0.55
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    2.42
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    2.91
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    1.58
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="17" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">F-16</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL -->
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Kips Bay Medical,
    Inc.<BR>
    (A Development Stage Company)<BR>
    <BR>
    Notes To Financial Statements&#151;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>
<!-- XBRL Pagebreak End -->

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: Arial, Helvetica">Nonemployee
    Stock-Based Compensation</FONT></I></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We account for stock options granted to nonemployees as required
    by FASB ASC 718. In connection with stock options granted to
    nonemployees we recorded $8,000, $292,000 and $342,000 for
    nonemployee stock-based compensation during the years ended
    December&#160;31, 2007, 2008 and 2009, respectively, and
    $642,000 for nonemployee stock-based compensation for the period
    from May&#160;1, 2007 (Date of Inception) to December&#160;31,
    2009. These amounts were based upon the fair value of the vested
    portion of the grants.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Amounts expensed during the remaining vesting period will be
    determined based on the fair value at the time of vesting.
</DIV>
<!-- XBRL,n -->
<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: Arial, Helvetica">8.&#160;</FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: Arial, Helvetica">Employee Benefit
    Plan</FONT></B>
</TD>
</TR>

</TABLE>
<!-- XBRL,body -->

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We maintain a simplified employee retirement plan, or SEP, which
    commenced on January&#160;1, 2008. The SEP is a defined
    contribution plan; employee contributions are voluntary and are
    determined on an individual basis, limited by the maximum
    amounts allowable under federal tax regulations. We contribute
    up to 3% of each individual&#146;s base salary as required under
    the safe-harbor provisions of Internal Revenue Service rules
    governing SEP plans. Our contributions vest immediately and are
    expensed when paid. We have recorded contributions of $33,000
    and $38,000 for the years ended December&#160;31, 2008 and 2009,
    respectively, and $71,000 for the period from May&#160;1, 2007
    (Date of Inception) to December&#160;31, 2009.
</DIV>
<!-- XBRL,n -->
<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: Arial, Helvetica">9.&#160;</FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: Arial, Helvetica">Income
    Taxes</FONT></B>
</TD>
</TR>

</TABLE>
<!-- XBRL,body -->

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have incurred net operating losses since inception. We have
    not reflected any benefit of such net operating loss
    carryforwards in the accompanying financial statements and have
    established a full valuation allowance against our deferred tax
    assets.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Deferred income taxes reflect the net tax effects of
    (a)&#160;temporary differences between the carrying amounts of
    assets and liabilities for financial reporting purposes and the
    amounts used for income tax purposes, and (b)&#160;operating
    losses and tax credit carryforwards.
</DIV>
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">F-17</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL -->
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Kips Bay Medical,
    Inc.<BR>
    (A Development Stage Company)<BR>
    <BR>
    Notes To Financial Statements&#151;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>
<!-- XBRL Pagebreak End -->



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The significant components of our deferred tax assets for the
    years ended December&#160;31, 2008 and 2009 are as follows:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="75%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="8" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>December&#160;31,</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2009</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Deferred tax assets:
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Net operating loss carryforwards
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;1,438
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;2,838
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Intangible assets&#151;license agreement
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    62
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    89
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Stock-based compensation
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    134
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    283
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Short term investment impairment
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    37
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    37
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Research credit carryforwards
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    200
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    408
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Other
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    61
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    51
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 30pt">
    Total deferred tax assets
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,932
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,706
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Deferred tax liabilities:
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 30pt">
    Total deferred taxes
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,932
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,706
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Valuation allowance
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (1,932
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (3,706
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Net deferred tax asset
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="9" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD colspan="9" align="right" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 8pt">(In thousands)
    </FONT>
</DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    A reconciliation of the statutory tax rates and the effective
    tax rates for the years ended December&#160;31, 2007, 2008 and
    2009 is as follows:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="55%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="11%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="2%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="2%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=05 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=05 type=lead -->
    <TD width="11%" align="right">&nbsp;</TD>	<!-- colindex=05 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=05 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="16" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Period from<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Period from<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>May&#160;1, 2007<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>May&#160;1, 2007<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>(Date of Inception)<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>(Date of Inception)<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>to December&#160;31,<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Year Ended December&#160;31,</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>to December&#160;31,<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2007</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2009</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2009</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Statutory rate
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    34.0
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    34.0
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    34.0
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    34.0
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Permanent differences
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (7.2
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (3.3
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (1.4
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (2.7
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    State and local income taxes
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    7.7
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    8.9
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    9.4
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    9.0
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Credits and other
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1.8
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    5.0
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    5.5
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    5.0
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Valuation allowance
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (36.3
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (44.6
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (47.5
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (45.3
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    0.0
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    0.0
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    0.0
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    0.0
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="17" valign="bottom">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Realization of the future tax benefits is dependent on our
    ability to generate sufficient taxable income within the
    carryforward period. Because of our history of operating losses,
    management believes that the deferred tax assets arising from
    the above-mentioned future tax benefits are currently not likely
    to be realized and, accordingly, we have provided a full
    valuation allowance. The net valuation allowance increased by
    $1.7&#160;million and $1.8&#160;million for the years ended
    December&#160;31, 2008 and 2009, respectively, and
    $3.7&#160;million for the period from May&#160;1, 2007 (Date of
    Inception) to December&#160;31, 2009.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Net operating losses and tax credit carryforwards as of
    December&#160;31, 2009, are as follows:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="73%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="4%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="4%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="13%">&nbsp;</TD>	<!-- colindex=03 type=maindata -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="7" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Amount</B>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Expiration Years</B>
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom">
<TD align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Net operating losses&#151;federal
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;6,481
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
    Beginning 2027
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Tax credits&#151;federal
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    396
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
    Beginning 2027
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="7" valign="top">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
<TR valign="bottom">
<TD colspan="7" align="right" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <FONT style="font-size: 8pt">(In thousands)
    </FONT>
</DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">F-18</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL -->
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Kips Bay Medical,
    Inc.<BR>
    (A Development Stage Company)<BR>
    <BR>
    Notes To Financial Statements&#151;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>
<!-- XBRL Pagebreak End -->



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Utilization of the net operating loss carryforwards and credits
    may be subject to a substantial annual limitation due to the
    ownership change limitations provided by the Internal Revenue
    Code of 1986, as amended, or the IRC, and similar state
    provisions. We have not performed a detailed analysis to
    determine whether an ownership change under Section&#160;382 of
    the IRC has occurred. The effect of an ownership change would be
    the imposition of an annual limitation on the use of net
    operating loss carryforwards attributable to periods before the
    change.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We would classify interest and penalties related to uncertain
    tax positions in income tax expense, if applicable. There was no
    interest expense or penalties related to unrecognized tax
    benefits recorded through December&#160;31, 2009. The tax years
    2007 through 2009 remain open to examination by federal and
    state tax authorities.
</DIV>
<!-- XBRL,n -->
<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: Arial, Helvetica">10.&#160;</FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: Arial, Helvetica">Subsequent
    Event</FONT></B>
</TD>
</TR>

</TABLE>
<!-- XBRL,body -->

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    As discussed in note&#160;6 above, in October 2009, we commenced
    a private offering of 714,286&#160;shares of our common stock to
    certain accredited investors at an offering price of $7.00 per
    share. Subsequent to December&#160;31, 2009, we sold an
    additional 182,872&#160;shares of common stock, raising gross
    proceeds of $1.3&#160;million. This offering was completed in
    February&#160;2010.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Also as discussed in note&#160;6 above, in February 2010, KBI
    exercised its second stock purchase option under the Investment
    Agreement. At that time we also agreed to convert the interest
    on the Notes previously paid in cash to common stock. In
    conjunction with this transaction we issued
    1,000,000&#160;shares of our common stock in exchange for gross
    proceeds of $3.8&#160;million.
</DIV>
<!-- /XBRL,ns -->
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">F-19</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<CENTER style="font-size: 1pt; width: 100%; border-bottom: 2pt solid #000000"></CENTER>

<CENTER style="font-size: 1pt; width: 100%; border-bottom: 1pt solid #000000"></CENTER>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B><FONT style="font-size: 16pt; font-family: Arial, Helvetica">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;Shares</FONT></B>
</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B><FONT style="font-size: 24pt; font-family: Arial, Helvetica">Kips
    Bay Medical, Inc.</FONT></B>
</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <IMG src="c56813c5681311.gif" alt="(KIPS BAY MEDICAL, INC. LOGO)"><FONT style="font-size: 24pt">
    </FONT>
</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B><FONT style="font-size: 12pt; font-family: Arial, Helvetica">Common
    Stock</FONT></B>
</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<CENTER style="font-size: 1pt; width: 18%; border-bottom: 1pt solid #000000"></CENTER>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B><FONT style="font-size: 16pt; font-family: Arial, Helvetica">Prospectus</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<CENTER style="font-size: 1pt; width: 18%; border-bottom: 1pt solid #000000"></CENTER>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B><FONT style="font-size: 16pt; font-family: Arial, Helvetica">Jefferies&#160;&#038;
    Company</FONT></B>
</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="font-size: 11pt">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;,
    2010
    </FONT>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 8pt; font-size: 1pt">&nbsp;</DIV>

<CENTER style="font-size: 1pt; width: 100%; border-bottom: 1pt solid #000000"></CENTER>

<CENTER style="font-size: 1pt; width: 100%; border-bottom: 2pt solid #000000"></CENTER>
<!-- XBRL Pagebreak Begin -->

<P align="left" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Part&#160;II<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Information Not
    Required In Prospectus</FONT></B>
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="8%"></TD>
    <TD width="92%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: Arial, Helvetica">Item&#160;13.&#160;</FONT></B>
</TD>
    <TD>
    <B><I><FONT style="font-family: Arial, Helvetica">Other Expenses
    of Issuance and Distribution.</FONT></I></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The following table sets forth the costs and expenses, other
    than the underwriting discounts and commissions, payable by us
    in connection with the sale of common stock being registered.
    All amounts shown are estimates, except the SEC registration
    fee, the Financial Industry Regulatory Authority, or FINRA,
    filing fee and the NASDAQ Global Market listing fee.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="88%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 2pt" valign="bottom" align="center">
<TD colspan="4" align="center" valign="bottom">
    <DIV style="font-size: -2pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Amount</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    SEC registration fee
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;4,100
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    FINRA filing fee
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    6,250
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    NASDAQ Global Market listing fee
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    *
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Blue sky fees and expenses
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    *
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Legal fees and expenses
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    *
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Accounting fees and expenses
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    *
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Printing expenses
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    *
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Transfer agent and registrar fees and expenses
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    *
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Miscellaneous
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    *
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Total
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;*
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 2pt">
<TD colspan="5" valign="top">
    <DIV style="font-size: 3pt; margin-left: 0%; width: 100%; border-bottom: 1pt solid #000000"></DIV>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

<TR>
    <TD width="1%"></TD>
    <TD width="1%"></TD>
    <TD width="98%"></TD>
</TR>

<TR>
    <TD align="right" valign="top">
    * </TD>
    <TD></TD>
    <TD valign="bottom">
    To be filed by amendment.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="8%"></TD>
    <TD width="92%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: Arial, Helvetica">Item&#160;14.&#160;</FONT></B>
</TD>
    <TD>
    <B><I><FONT style="font-family: Arial, Helvetica">Indemnification
    of Directors and Officers.</FONT></I></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Section&#160;145 of the Delaware General Corporation Law
    provides that a corporation may indemnify any person made a
    party to an action by reason of the fact that he or she was a
    director, executive officer, employee or agent of the
    corporation or is or was serving at the request of the
    corporation against expenses (including attorneys&#146; fees),
    judgments, fines and amounts paid in settlement actually and
    reasonably incurred by him or her in connection with such action
    if he or she acted in good faith and in a manner he or she
    reasonably believed to be in, or not opposed to, the best
    interests of the corporation and, with respect to any criminal
    action or proceeding, had no reasonable cause to believe his or
    her conduct was unlawful, except that, in the case of an action
    by or in right of the corporation, no indemnification may
    generally be made in respect of any claim as to which such
    person is adjudged to be liable to the corporation.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our certificate of incorporation and amended and restated bylaws
    limit the liability of our directors to the fullest extent
    permitted by Delaware law. Delaware law provides that directors
    of a corporation will not be personally liable for monetary
    damages for breach of their fiduciary duties as directors,
    except for liability for any:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="2%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    breach of their duty of loyalty to us or our stockholders;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    act or omission not in good faith or that involves intentional
    misconduct or a knowing violation of law;
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    unlawful payment of dividends or redemption of shares as
    provided in Section 174 of the Delaware General Corporation Law;
    or
</TD>
</TR>


<TR style="line-height: 4pt; font-size: 1pt"><TD>&nbsp;</TD></TR>




<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    transaction from which the directors derived an improper
    personal benefit.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    These limitations of liability do not apply to liabilities
    arising under federal securities laws and do not affect the
    availability of equitable remedies such as injunctive relief or
    rescission. Our amended and restated bylaws, which will become
    effective upon the closing of this offering, provide that we
    will indemnify our directors and executive officers, and may
    indemnify other officers, employees and other agents, to the
    fullest extent permitted by law.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    As permitted by the Delaware General Corporation Law, we have
    entered into indemnification agreements with each of our
    directors and executive officers that require us to indemnify
    such persons against expenses, judgments,
</DIV>
<!-- XBRL Paragraph Pagebreak -->
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">II-1</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    penalties, fines, settlements and other amounts actually and
    reasonably incurred, including expenses of a derivative action,
    in connection with an actual or threatened proceeding if any of
    them may be made a party because he or she is or was one of our
    directors. We will be obligated to pay these amounts only if the
    director acted in good faith and in a manner that he or she
    reasonably believed to be in or not opposed to our best
    interests. With respect to any criminal proceeding, we will be
    obligated to pay these amounts only if the director had no
    reasonable cause to believe his or her conduct was unlawful. The
    indemnification agreements also set forth certain procedures
    that will apply in the event of a claim for indemnification.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The underwriting agreement (Exhibit&#160;1.1 hereto) provides
    for indemnification by the underwriters of us and our executive
    officers and directors, and by us of the underwriters for
    certain liabilities, including liabilities arising under the
    Securities Act, in connection with matters specifically provided
    in writing by the underwriters for inclusion in the registration
    statement.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Section&#160;145(g) of the Delaware General Corporation Law
    permits a corporation to purchase and maintain insurance on
    behalf of any person who is or was a director, officer,
    employee, or agent of the corporation arising out of his or her
    actions in connection with their services to us, regardless of
    whether our amended and restated bylaws permit indemnification.
    We have purchased and intend to maintain insurance on behalf of
    any person who is or was a director or officer against any loss
    arising from any claim asserted against him or her and incurred
    by him or her in any such capacity, subject to certain
    exclusions.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="8%"></TD>
    <TD width="92%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: Arial, Helvetica">Item&#160;15.&#160;</FONT></B>
</TD>
    <TD>
    <B><I><FONT style="font-family: Arial, Helvetica">Recent Sales
    of Unregistered Securities.</FONT></I></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Since our inception in May 2007, we have issued and sold the
    following unregistered securities:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    1.&#160;In July 2007, we issued an aggregate of
    5,700,000&#160;shares of our common stock to our officers and
    director at a per share price of $0.0167 per share for aggregate
    consideration of $95,000.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    2.&#160;We have granted stock options to purchase an aggregate
    of 803,000&#160;shares of our common stock at exercise prices
    ranging from $1.00 to $7.00 per share through a total of 43
    grants to executive officers, employees, director and
    consultants pursuant to our 2007 Long-Term Incentive Plan.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    3.&#160;We have issued and sold an aggregate of
    1,000&#160;shares of our common stock to an employee, at a price
    of $1.00 per share pursuant to exercises of options granted
    under our 2007 Long Term Incentive Plan.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    4.&#160;In April 2008, KBI exercised its option to purchase
    shares in connection with the Investment Agreement and related
    convertible promissory notes entered into with KBI in July 2007.
    Between May&#160;2008 and June&#160;2009, we issued an aggregate
    of 600,000&#160;shares of our common stock to KBI for aggregate
    consideration of $3.5&#160;million in satisfaction of this
    exercise.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    5.&#160;In March 2009, we issued an aggregate of
    5,147,389&#160;shares of our common stock to KBI for aggregate
    consideration of $3.2&#160;million in connection with the
    Investment Agreement and related convertible promissory notes
    entered into with KBI in July 2007.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    6.&#160;In February 2010, we issued 1,000,000&#160;shares of our
    common stock to KBI for aggregate consideration of
    $3.8&#160;million.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    7.&#160;During March through August 2009, we issued and sold in
    a series of closings, an aggregate of 516,241&#160;shares of our
    common stock at a per share price of $6.00, for aggregate
    consideration of $3.1&#160;million in a private placement
    offering.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    8.&#160;During October 2009 through February 2010, we issued and
    sold an aggregate of 317,161&#160;shares of our common stock in
    at a per share price of $7.00, for aggregate consideration of
    $2.2&#160;million in a private placement offering.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The offers, sales and issuances of the securities described in
    1-3 above were deemed to be exempt from registration under the
    Securities Act under either (i)&#160;Rule&#160;701 promulgated
    under the Securities Act as offers and sale of securities
    pursuant to certain compensatory benefit plans and contracts
    relating to compensation in compliance with Rule&#160;701 or
    (ii)&#160;Section&#160;4(2) of the Securities Act as
    transactions by an issuer not involving any public offering. The
    recipients of securities in each of these transactions
    represented their intention to acquire the
</DIV>
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<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">II-2</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    securities for investment only and not with view to or for sale
    in connection with any distribution thereof and appropriate
    legends were affixed to the share certificates and instruments
    issued in such transactions. All recipients had adequate access,
    through their relationships with us, to information about us.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The offers, sales, and issuances of the securities described in
    4-8 above were deemed to be exempt from registration under the
    Securities Act in reliance on Section&#160;4(2) of the
    Securities Act and Regulation&#160;D promulgated thereunder as
    transactions by an issuer not involving a public offering. The
    recipients of securities in each of these transactions acquired
    the securities for investment only and not with a view to or for
    sale in connection with any distribution thereof and appropriate
    legends were affixed to the securities issued in these
    transactions. Each of the recipients of securities in these
    transactions was an accredited or sophisticated person and had
    adequate access, through employment, business or other
    relationships, to information about us.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="8%"></TD>
    <TD width="92%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: Arial, Helvetica">Item&#160;16.&#160;</FONT></B>
</TD>
    <TD>
    <B><I><FONT style="font-family: Arial, Helvetica">Exhibits and
    Financial Statement Schedules.</FONT></I></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>(a)&#160;Exhibits.</I>
</DIV>

<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Exhibit&#160;Index</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="3%" align="right">&nbsp;</TD>	<!-- colindex=01 type=lead -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=01 type=body -->
    <TD width="3%" align="left">&nbsp;</TD>	<!-- colindex=01 type=align1 -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="90%">&nbsp;</TD>	<!-- colindex=02 type=maindata -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Exhibit<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD colspan="3" nowrap align="center" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Number</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Description of Exhibit</B>
</DIV>
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    1
</TD>
<TD nowrap align="left" valign="top">
    .1*
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Underwriting Agreement.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    3
</TD>
<TD nowrap align="left" valign="top">
    .1
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Certificate of Incorporation of the Registrant.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    3
</TD>
<TD nowrap align="left" valign="top">
    .2
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Amended and Restated Bylaws of the Registrant.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    4
</TD>
<TD nowrap align="left" valign="top">
    .1*
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Common Stock Certificate.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    5
</TD>
<TD nowrap align="left" valign="top">
    .1*
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Opinion of Fredrikson &#038; Byron, P.A., counsel to the
    Registrant, with respect to the legality of securities being
    registered.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
    <U>Lease Agreements</U>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .1
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Lease Agreement by and between the Registrant and St.  Paul
    Properties, Inc., as assigned to St.  Paul Fire and Marine
    Insurance Company, dated as of July 26, 2007.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    <U>Loan and Financing Agreements</U>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .2
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Investment Agreement by and between the Registrant and Kips Bay
    Investments, LLC, dated as of July 19, 2007.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .3
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Loan and Security Agreement by and between the Registrant and
    Kips Bay Investments, LLC, dated as of June 19, 2007.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .4
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    First Secured Convertible Promissory Note executed by the
    Registrant in favor of Kips Bay Investments, LLC, dated as of
    June 19, 2007.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .5
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Second Secured Convertible Promissory Note executed by the
    Registrant in favor of Kips Bay Investments, LLC, dated as of
    June 19, 2007.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .6
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Agreement by and between the Registrant and Kips Bay
    Investments, LLC, dated as of February 12, 2010.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .7
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Debt Conversion Agreement by and between the Registrant and Kips
    Bay Investments, LLC, dated as of February 12, 2010.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    <U>Agreements with Respect to Collaborations, Licenses, Research
    and Development</U>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .8+
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Assignment and License Agreement by and between the Registrant
    and Medtronic, Inc., dated as of October 9, 2007.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .9
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Assignment by Medtronic, Inc. to the Registrant, dated as of
    August 26, 2008.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .10
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Trademark Transfer Agreement by Medtronic, Inc. to the
    Registrant, dated as of October 10, 2007.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    <U>Agreements with Executive Officers</U>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .11@
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Employment Agreement by and between the Registrant and Manuel A.
    Villafa&#241;a, dated as of July 19, 2007.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .12@
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Employment Agreement by and between the Registrant and Michael
    Winegar, dated as of September 1, 2007.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .13@
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Employment Agreement by and between the Registrant and Scott
    Kellen, dated as of February 8, 2010.
</TD>
</TR>
</TABLE>
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">II-3</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->
<!-- XBRL Table Pagebreak -->

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="3%" align="right">&nbsp;</TD>	<!-- colindex=01 type=lead -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=01 type=body -->
    <TD width="3%" align="left">&nbsp;</TD>	<!-- colindex=01 type=align1 -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="90%">&nbsp;</TD>	<!-- colindex=02 type=maindata -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Exhibit<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD colspan="3" nowrap align="center" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Number</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Description of Exhibit</B>
</DIV>
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .14@*
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Indemnification Agreement between the Registrant and its
    Directors and Executive Officers.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .15@
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Change in Control Agreement by and between the Registrant and
    Manuel A. Villafa&#241;a, dated as of September 12, 2008.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .16@
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Change in Control Agreement by and between the Registrant and
    Michael Winegar, dated as of September 12, 2008.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .17@
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Change in Control Agreement by and between the Registrant and
    Scott Kellen, dated as of February 8, 2010.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    <U>Equity Compensation Plans</U>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .18@
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    2007 Long-Term Incentive Plan.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .19@
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Incentive Stock Option Agreement under the 2007
    Long-Term Incentive Plan.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .20@
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Non-Qualified Stock Option Agreement under the 2007
    Long-Term Incentive Plan.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .21@
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Restricted Stock Agreement under the 2007 Long-Term
    Incentive Plan.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    21
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Subsidiaries of the Registrant - None.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    23
</TD>
<TD nowrap align="left" valign="top">
    .1
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Consent of Ernst &#038; Young LLP.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    23
</TD>
<TD nowrap align="left" valign="top">
    .2*
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Consent of Fredrikson &#038; Byron, P.A.  (see Exhibit 5.1).
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    24
</TD>
<TD nowrap align="left" valign="top">
    .1
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Powers of Attorney (see signature page to initial filing).
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    99
</TD>
<TD nowrap align="left" valign="top">
    .1
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Consent of Michael Winegar
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    99
</TD>
<TD nowrap align="left" valign="top">
    .2
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Consent of Arch C. Smith
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    99
</TD>
<TD nowrap align="left" valign="top">
    .3
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Consent of Robert E. Munzenrider
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    99
</TD>
<TD nowrap align="left" valign="top">
    .4
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Consent of Robert J. Sheehy
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="font-size: 1pt; margin-left: 0%; width: 13%;  align: left; border-bottom: 1pt solid #000000"></DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

<TR>
    <TD width="1%"></TD>
    <TD width="1%"></TD>
    <TD width="98%"></TD>
</TR>

<TR>
    <TD valign="top">
    * </TD>
    <TD></TD>
    <TD valign="bottom">
    <I>To be filed by amendment.</I></TD>
</TR>


<TR style="line-height: 3pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD valign="top">
    + </TD>
    <TD></TD>
    <TD valign="bottom">
    <I>Confidential treatment will be requested for portions of this
    exhibit.</I></TD>
</TR>


<TR style="line-height: 3pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD valign="top">
    @ </TD>
    <TD></TD>
    <TD valign="bottom">
    <I>Denotes management compensation plan or contract.</I></TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>(b)&#160;Financial Statement Schedules.</I>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    All schedules are omitted as the required information is
    inapplicable or the information is presented in the financial
    statements or related notes.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Schedule&#160;II. Valuation and Qualifying Accounts
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    All other schedules are omitted as the required information is
    inapplicable or the information is presented in the financial
    statements or related notes.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="8%"></TD>
    <TD width="92%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: Arial, Helvetica">Item&#160;17.&#160;</FONT></B>
</TD>
    <TD>
    <B><I><FONT style="font-family: Arial, Helvetica">Undertakings.</FONT></I></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The undersigned registrant hereby undertakes to provide to the
    underwriters at the closing specified in the underwriting
    agreement, certificates in such denominations and registered in
    such names as required by the underwriters to permit prompt
    delivery to each purchaser.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Insofar as indemnification for liabilities arising under the
    Securities Act 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 and is 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 and will be governed by the final
    adjudication of such issue.
</DIV>
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">II-4</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The undersigned registrant hereby undertakes that:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (1)&#160;For purposes of determining any liability under the
    Securities Act, the information omitted from the form of
    prospectus filed as part of this registration statement in
    reliance upon Rule&#160;430A and contained in a form of
    prospectus filed by the registrant pursuant to
    Rule&#160;424(b)(1) or (4)&#160;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.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    (2)&#160;For the purpose of determining any liability under the
    Securities Act, each post-effective amendment that contains a
    form of prospectus shall be deemed to be a new registration
    statement relating to the securities offered, and the offering
    of these securities at that time shall be deemed to be the
    initial bona fide offering.
</DIV>
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">II-5</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Signatures</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Pursuant to the requirements of the Securities Act of 1933, as
    amended, the registrant has duly caused this registration
    statement on
    <FONT style="white-space: nowrap">Form&#160;S-1</FONT>
    to be signed on its behalf by the undersigned, thereunto duly
    authorized, in the City of Minneapolis, State of Minnesota on
    this 8th&#160;day of April, 2010.
</DIV>

<DIV style="margin-top: 24pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 49%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Kips Bay Medical, Inc.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="49%"></TD>
    <TD width="4%"></TD>
    <TD width="47%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    By:&#160;
</TD>
    <TD align="left">
    <DIV style="display:inline; text-align:left;">/s/&#160;&#160;Manny
    Villafa&#241;a</DIV>
</TD>
</TR>

</TABLE>

<DIV style="font-size: 2pt; margin-left: 53%; width: 100%;  align: left; border-bottom: 1pt solid #000000"></DIV>

<DIV align="left" style="margin-left: 53%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Manny Villafa&#241;a
</DIV>

<DIV align="left" style="margin-left: 53%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Chairman of the Board and Chief<BR>
    Executive Officer
</DIV>

<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Power Of
    Attorney</FONT></B>
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
    signature appears below hereby constitutes and appoints Manny
    Villafa&#241;a and Scott Kellen, and each of them acting
    individually, as his true and lawful attorneys-in-fact and
    agents, with full power of each to act alone, with full powers
    of substitution and resubstitution, for him and in his name,
    place and stead, in any and all capacities, to sign the
    Registration Statement filed herewith and any and all amendments
    to said Registration Statement (including post-effective
    amendments and any related registration statements thereto filed
    pursuant to Rule&#160;462 and otherwise), and file the same,
    with all exhibits thereto, and other documents in connection
    therewith, with the Securities and Exchange Commission, granting
    unto said attorneys-in-fact and agents, with full power of each
    to act alone, full power and authority to do and perform each
    and every act and thing requisite and necessary to be done in
    connection therewith, as fully for all intents and purposes as
    he might or could do in person, hereby ratifying and confirming
    all that said attorneys-in-fact and agents, or his or their
    substitutes, may lawfully do or cause to be done by virtue
    hereof.
</DIV>

<DIV style="margin-top: 7pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Pursuant to the requirements of the Securities Act of 1933, this
    registration statement has been signed by the following persons
    in the capacities and on the dates indicated.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="4%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="39%">&nbsp;</TD>	<!-- colindex=02 type=maindata -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="39%">&nbsp;</TD>	<!-- colindex=03 type=maindata -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="11%">&nbsp;</TD>	<!-- colindex=04 type=maindata -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD colspan="3" nowrap align="center" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Signature</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Title</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Date</B>
</DIV>
</TD>
</TR>
<TR style="line-height: 12pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom" style="line-height: 12pt">
<TD colspan="3">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD colspan="3" valign="top">
    <DIV style="display:inline; text-align:left;">/s/&#160;&#160;Manny
    Villafa&#241;a</DIV><BR>
    <DIV style="font-size: 2pt; margin-left: 0%; width: 100%;  align: left; border-bottom: 1pt solid #000000"></DIV>Manny
    Villafa&#241;a
</TD>
<TD>
&nbsp;
</TD>
<TD align="center" valign="top">
    Chairman of the Board, Chief Executive Officer, and Director<BR>
    (principal executive officer)
</TD>
<TD>
&nbsp;
</TD>
<TD align="center" valign="top">
    April 8, 2010
</TD>
</TR>
<TR valign="bottom" style="line-height: 12pt">
<TD colspan="3">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD colspan="3" valign="top">
    <DIV style="display:inline; text-align:left;">/s/&#160;&#160;Scott
    Kellen</DIV><BR>
    <DIV style="font-size: 2pt; margin-left: 0%; width: 100%;  align: left; border-bottom: 1pt solid #000000"></DIV>Scott
    Kellen
</TD>
<TD>
&nbsp;
</TD>
<TD align="center" valign="top">
    Chief Financial Officer and<BR>
    Vice President of Finance<BR>
    (principal financial officer and principal accounting officer)
</TD>
<TD>
&nbsp;
</TD>
<TD align="center" valign="top">
    April 8, 2010
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>
<!-- XBRL Pagebreak Begin -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    <I><FONT style="font-size: 8pt; font-family: Arial, Helvetica">II-6</FONT></I>
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 12pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: Arial, Helvetica">Kips Bay Medical,
    Inc.<BR>
    Registration Statement On
    <FONT style="white-space: nowrap">Form&#160;S-1</FONT><BR>
    <BR>
    Exhibit&#160;Index</FONT></B>
</DIV>

<DIV style="margin-top: 21pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="3%" align="right">&nbsp;</TD>	<!-- colindex=01 type=lead -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=01 type=body -->
    <TD width="3%" align="left">&nbsp;</TD>	<!-- colindex=01 type=align1 -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="90%">&nbsp;</TD>	<!-- colindex=02 type=maindata -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Exhibit<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD colspan="3" nowrap align="center" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Number</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Description of Exhibit</B>
</DIV>
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    1
</TD>
<TD nowrap align="left" valign="top">
    .1*
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Underwriting Agreement.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    3
</TD>
<TD nowrap align="left" valign="top">
    .1
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Certificate of Incorporation of the Registrant.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    3
</TD>
<TD nowrap align="left" valign="top">
    .2
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Amended and Restated Bylaws of the Registrant.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    4
</TD>
<TD nowrap align="left" valign="top">
    .1*
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Common Stock Certificate.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    5
</TD>
<TD nowrap align="left" valign="top">
    .1*
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Opinion of Fredrikson &#038; Byron, P.A., counsel to the
    Registrant, with respect to the legality of securities being
    registered.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
    <U>Lease Agreements</U>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .1
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Lease Agreement by and between the Registrant and St.  Paul
    Properties, Inc., as assigned to St.  Paul Fire and Marine
    Insurance Company, dated as of July 26, 2007.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    <U>Loan and Financing Agreements</U>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .2
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Investment Agreement by and between the Registrant and Kips Bay
    Investments, LLC, dated as of July 19, 2007.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .3
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Loan and Security Agreement by and between the Registrant and
    Kips Bay Investments, LLC, dated as of June 19, 2007.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .4
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    First Secured Convertible Promissory Note executed by the
    Registrant in favor of Kips Bay Investments, LLC, dated as of
    June 19, 2007.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .5
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Second Secured Convertible Promissory Note executed by the
    Registrant in favor of Kips Bay Investments, LLC, dated as of
    June 19, 2007.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .6
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Agreement by and between the Registrant and Kips Bay
    Investments, LLC, dated as of February 12, 2010.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .7
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Debt Conversion Agreement by and between the Registrant and Kips
    Bay Investments, LLC, dated as of February 12, 2010.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    <U>Agreements with Respect to Collaborations, Licenses, Research
    and Development</U>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .8+
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Assignment and License Agreement by and between the Registrant
    and Medtronic, Inc., dated as of October 9, 2007.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .9
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Assignment by Medtronic, Inc. to the Registrant, dated as of
    August 26, 2008.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .10
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Trademark Transfer Agreement by Medtronic, Inc. to the
    Registrant, dated as of October 10, 2007.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    <U>Agreements with Executive Officers</U>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .11@
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Employment Agreement by and between the Registrant and Manuel A.
    Villafa&#241;a, dated as of July 19, 2007.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .12@
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Employment Agreement by and between the Registrant and Michael
    Winegar, dated as of September 1, 2007.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .13@
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Employment Agreement by and between the Registrant and Scott
    Kellen, dated as of February 8, 2010.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .14@*
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Indemnification Agreement between the Registrant and its
    Directors and Executive Officers.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .15@
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Change in Control Agreement by and between the Registrant and
    Manuel A. Villafa&#241;a, dated as of September 12, 2008.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .16@
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Change in Control Agreement by and between the Registrant and
    Michael Winegar, dated as of September 12, 2008.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .17@
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Change in Control Agreement by and between the Registrant and
    Scott Kellen, dated as of February 8, 2010.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    <U>Equity Compensation Plans</U>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .18@
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    2007 Long-Term Incentive Plan.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .19@
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Incentive Stock Option Agreement under the 2007
    Long-Term Incentive Plan.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .20@
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Non-Qualified Stock Option Agreement under the 2007
    Long-Term Incentive Plan.
</TD>
</TR>
</TABLE>
<!-- XBRL Pagebreak Begin -->

<P align="left" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<!-- XBRL Pagebreak End -->
<!-- XBRL Table Pagebreak -->

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="3%" align="right">&nbsp;</TD>	<!-- colindex=01 type=lead -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=01 type=body -->
    <TD width="3%" align="left">&nbsp;</TD>	<!-- colindex=01 type=align1 -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="90%">&nbsp;</TD>	<!-- colindex=02 type=maindata -->
</TR>
<!-- Table Width Row END -->
<!-- TableOutputHead -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Exhibit<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD colspan="3" nowrap align="center" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Number</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Description of Exhibit</B>
</DIV>
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<!-- TableOutputBody -->
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .21@
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Restricted Stock Agreement under the 2007 Long-Term
    Incentive Plan.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    21
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Subsidiaries of the Registrant - None.
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    23
</TD>
<TD nowrap align="left" valign="top">
    .1
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Consent of Ernst &#038; Young LLP.
</TD>
</TR>
<TR valign="bottom">
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    23
</TD>
<TD nowrap align="left" valign="top">
    .2*
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Consent of Fredrikson &#038; Byron, P.A.  (see Exhibit 5.1).
</TD>
</TR>
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<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    24
</TD>
<TD nowrap align="left" valign="top">
    .1
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Powers of Attorney (see signature page to initial filing).
</TD>
</TR>
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<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    99
</TD>
<TD nowrap align="left" valign="top">
    .1
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Consent of Michael Winegar
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    99
</TD>
<TD nowrap align="left" valign="top">
    .2
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Consent of Arch C. Smith
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    99
</TD>
<TD nowrap align="left" valign="top">
    .3
</TD>
<TD>
&nbsp;
</TD>
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    Consent of Robert E. Munzenrider
</TD>
</TR>
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    99
</TD>
<TD nowrap align="left" valign="top">
    .4
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Consent of Robert J. Sheehy
</TD>
</TR>
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sv1
Table of Contents
As filed with the Securities and Exchange Commission on
    April 8, 2010
Registration
No. 333-
UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
Washington, D.C.
    20549
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
KIPS BAY MEDICAL,
    INC.
(Exact name of registrant as
    specified in its charter)
Delaware
(State or other jurisdiction
    of
incorporation or organization)
3841
(Primary Standard
    Industrial
Classification Code Number)
20-8947689
(I.R.S.  Employer
Identification No.)
3405 Annapolis Lane North,
    Suite 200
Minneapolis, Minnesota 55447
(763) 235-3540
(Address, including
    zip code, and telephone number, including area code, of
    registrant's principal executive offices)
Manny Villafaña
Chairman and Chief Executive Officer
Kips Bay Medical, Inc.
3405 Annapolis Lane North, Suite 200
Minneapolis, Minnesota 55447
(763) 235-3540
(Name, address,
    including zip code, and telephone number, including area code,
    of agent for service)
Copies to:
Robert K. Ranum, Esq.
Thomas Steichen, Esq.
Alexander Rosenstein, Esq.
Fredrikson & Byron, P.A.
200 South Sixth Street, Suite 4000
Minneapolis, Minnesota 55402
(612) 492-7000
Frank F. Rahmani, Esq.
John T. McKenna, Esq.
Cooley Godward Kronish, LLP
3175 Hanover Street
Palo Alto, California 94304
(650) 843-5000
Approximate date of commencement 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,
    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
Indicate by check mark whether the registrant is a large
    accelerated filer, an accelerated filer, a non-accelerated
    filer, or a smaller reporting company. See the definitions of
    "large accelerated filer," "accelerated
    filer" and "smaller reporting company" in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
    filer
o
Accelerated
    filer
o
Non-accelerated
    filer
o
(Do not check if a smaller reporting company)
Smaller reporting
    company
þ
CALCULATION
    OF REGISTRATION FEE
Proposed Maximum
Title of Each Class of
Aggregate
Amount of
Securities to be Registered
Offering Price(1)(2)
Registration Fee
Common stock, par value $0.01 per share
$57,500,000
$4,100
(1)
In accordance with
    Rule 457(o) under the Securities Act of 1933, the number of
    shares being registered and the proposed maximum offering price
    per share are not included in this table. Includes the offering
    price of additional shares that the underwriters have the option
    to purchase.
(2)
Estimated solely for the purpose
    of computing the registration fee pursuant to Rule 457(o) under
    the Securities Act.
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, as amended, or until the
    Registration Statement shall become effective on such date as
    the Commission, acting pursuant to said Section 8(a), may
    determine.
Table of Contents
The
information in this preliminary prospectus is not complete and
may be changed. We may not sell these securities until the
registration statement filed with Securities and Exchange
Commission is effective. This preliminary prospectus is not an
offer to sell these securities and is not soliciting an offer to
buy these securities in any state where the offer or sale is not
permitted.
SUBJECT
    TO COMPLETION, DATED APRIL 8, 2010
Preliminary
    Prospectus
Shares
Kips
    Bay Medical, Inc.
Common
    Stock
We are
    offering           shares
    of our common stock. This is our initial public offering, and no
    public market currently exists for our common stock. We expect
    that the initial public offering price will be between
    $      and
    $      per common share. We have
    applied for listing of our common stock on the NASDAQ Global
    Market under the symbol "KIPS."
Investing in our common stock involves a high degree of risk.
    Please read "Risk Factors" beginning on
    page 6.
Neither the Securities and Exchange Commission nor any state
    securities commission has approved or disapproved of these
    securities or determined if this prospectus is truthful or
    complete. Any representation to the contrary is a criminal
    offense.
PER SHARE
TOTAL
Public Offering Price
$
$
Underwriting Discounts and Commissions
$
$
Proceeds to Kips Bay Medical, Inc. (Before Expenses)
$
$
Delivery of the shares of common stock is expected to be made on
    or
    about          ,
    2010. We have granted the underwriters an option for a period of
    30 days to purchase, on the same terms and conditions set
    forth above, up to an
    additional           shares
    of our common stock to cover overallotments. If the underwriters
    exercise the option in full, the total underwriting discounts
    and commissions payable by us will be
    $      and the total proceeds to us,
    before expenses, will be $     .
Sole Book-Running
    Manager
Jefferies &
    Company
Prospectus
    dated          ,
    2010
Table of Contents
Our External Saphenous Vein Support Technology, or eSVS MESH, is a nitinol mesh sleeve that
is placed over the saphenous vein graft during
coronary artery bypass grafting, or
 CABG surgery. We believe the use of  our eSVS MESH with  saphenous vein grafts in CABG surgery could    improve
the long-term outcome of CABG procedures, including improved openness and improved
blood flow  through the saphenous vein graft, resulting in a reduced need for costly
and potentially complicated reoperations or revascularization procedures.
Caution: Investigational device. Limited by law to investigational use and not approved for
commercial sale by any regulatory agency.
Table of
    Contents
Prospectus Summary
1
Risk Factors
6
Special Note Regarding Forward-Looking
    Statements
21
Use of Proceeds
22
Dividend Policy
22
Capitalization
23
Dilution
24
Selected Financial Data
26
Management's Discussion and Analysis of
    Financial Condition and Results of Operations
27
Business
38
Management
58
Director Compensation
62
Executive Compensation
63
Certain Relationships and Related Party
    Transactions
70
Principal Stockholders
72
Description of Common Stock
73
Shares Eligible for Future Sale
77
Underwriting
79
Material United States Federal Tax Considerations
    for
Non-U.S.
Holders of Common Stock
84
Legal Matters
87
Experts
87
Where You Can Find More Information
87
Index to Financial Statements
F-1
EX-3.1
EX-3.2
EX-10.1
EX-10.2
EX-10.3
EX-10.4
EX-10.5
EX-10.6
EX-10.7
EX-10.8
EX-10.9
EX-10.10
EX-10.11
EX-10.12
EX-10.13
EX-10.15
EX-10.16
EX-10.17
EX-10.18
EX-10.19
EX-10.20
EX-10.21
EX-23.1
EX-99.1
EX-99.2
EX-99.3
EX-99.4
Until          ,
    2010 (25 days after the date of this prospectus), all
    dealers that buy, sell, or trade the common shares, 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.
We have not authorized anyone to give any information or to make
    any representations other than those contained in this
    prospectus. Do not rely upon any information or representations
    made outside of this prospectus. This prospectus is not an offer
    to sell, and it is not soliciting an offer to buy, (1) any
    securities other than our common shares or (2) our common
    shares in any circumstances in which our offer or solicitation
    is unlawful. The information contained in this prospectus may
    change after the date of this prospectus. Do not assume after
    the date of this prospectus that the information contained in
    this prospectus is still correct.
Table of Contents
Prospectus
    Summary
This summary highlights certain information about us, this
    offering and selected information contained in the prospectus.
    This summary is not complete and does not contain all of the
    information that you should consider before deciding whether to
    invest in our common stock. For a more complete understanding of
    our company and this offering, we encourage you to read and
    consider the more detailed information in the prospectus,
    including "Risk Factors" and the financial statements
    and related notes. Unless we specify otherwise, all references
    in this prospectus to "Kips Bay," "we,"
    "our," "us" and "our company"
    refer to Kips Bay Medical, Inc.
Overview
We are a medical device company focused on developing,
    manufacturing and commercializing our innovative external
    saphenous vein support technology, or eSVS MESH, for use in
    coronary artery bypass grafting, or CABG, surgery. Our eSVS MESH
    is a nitinol mesh sleeve that, when placed over a saphenous vein
    graft during CABG surgery, is designed to improve the structural
    characteristics and long-term performance of the vein graft.
    Based on the data collected in a 90 patient multi-center
    clinical trial conducted outside the United States, we submitted
    our CE Mark application in February 2010. We expect to receive
    CE Mark approval and begin marketing our eSVS MESH in select
    European Union markets in the second half of 2010. The United
    States Food and Drug Administration, or FDA, is reviewing our
    application for an investigational device exemption, or IDE,
    which, if granted, will allow us to begin clinical trials of our
    eSVS MESH in the United States. We anticipate beginning
    enrollment in a United States IDE trial in the second half of
    2010. Currently, we have no products available for commercial
    sale and to date we have not generated any revenue from the sale
    of products.
Industry
    Background
According to the American Heart Association, approximately
    17.6 million people in the United States have coronary
    artery disease, and approximately 587,000 people in the
    United States die each year as a result of the disease. In
    addition, according to a 2007 World Health Organization report,
    approximately 7.2 million people worldwide died of coronary
    heart disease in 2002. Physicians and patients may select among
    a variety of treatments to address coronary artery disease,
    including pharmaceutical therapy, balloon angioplasty, stenting
    with bare metal or drug-eluting stents, and CABG procedures,
    with the selection often depending upon the stage of the disease
    and the age of the patient.
CABG is one of the most commonly performed surgeries in the
    United States, with the American Heart Association estimating
    that 448,000 were performed in the United States in 2006. In
    addition, the Millennium Research Group, an independent market
    research firm, estimates that there will be 165,000 CABG
    procedures in Europe per year by 2013. An independent study
    comparing CABG and implantation of drug-eluting stents shows
    that CABG is the more effective long-term treatment for coronary
    artery disease, achieving the best long-term patient outcomes as
    measured by survival rate and need for re-intervention
    12 months after surgery. Moreover, patients with severe and
    multi-vessel coronary artery disease often cannot be effectively
    treated with methods other than CABG. According to the
    Millennium Research Group, moderate growth in CABG procedures is
    expected in the United States through 2012 and in Europe through
    2013, largely due to the increase in procedure volumes caused by
    rising rates of coronary disease and the need for repeat
    revascularizations.
In CABG procedures, surgeons harvest blood vessels, including
    the internal mammary artery from the chest and the saphenous
    vein from the leg, and attach the harvested vessels to bypass,
    or provide blood flow around, blocked coronary arteries. The
    effectiveness of the procedure, however, is often limited by the
    failure rate of saphenous vein grafts, which has been shown in
    various studies to range from 6% to 30% one year after surgery
    and 60% ten years after surgery. Failure of these grafts,
    typically evidenced by partial or complete blockage and reduced
    or stopped blood flow, can lead to the need for further coronary
    interventions up to and including additional CABG procedures. We
    believe the use of our eSVS MESH with saphenous vein grafts in
    CABG surgery could improve the long-term outcome of CABG
    procedures, including improved openness, or patency, and
    improved blood flow through the saphenous vein graft, resulting
    in a reduced need for costly and potentially complicated
    reoperations or revascularization procedures.
1
Table of Contents
According to results published in the European Journal of
    Cardio-Thoracic Surgery in 2009, each CABG procedure involves an
    average of 3.3 bypass grafts, typically consisting of the left
    internal mammary artery, or LIMA, for one graft and the
    saphenous vein for the remaining 2.3 grafts per procedure. Some
    of the main advantages of using the saphenous vein include its
    ease of accessibility, its ease of handling, and the number of
    grafts, typically three, that can be constructed from a single
    vein. Despite these advantages and the widespread use of
    saphenous veins in CABG surgery, saphenous vein grafts fail more
    frequently than LIMA grafts due to differences in structure and
    size of saphenous vein grafts as compared to LIMA grafts. Unlike
    the LIMA, which is a thick-walled artery intended to handle the
    high pressure blood flow from the heart, saphenous veins are
    thin-walled vessels that are intended for a low-pressure venous
    environment. Saphenous veins are also typically larger than the
    coronary arteries to which they are attached and this difference
    in size slows blood flow, adding stress to the vessel wall and
    increasing the risk of thrombosis, or blood clotting. When the
    vein grafts used to bypass a blocked artery are exposed to the
    high pressure of arterial flow, there is significant stress on
    the thin wall of the veins. The vein responds to this injury by
    causing its walls to thicken in a manner that often leads to
    failure of the bypass graft.
Our
    Solution
Our eSVS MESH is designed to address these limitations by
    providing the vein graft with physiological attributes similar
    to those of an artery by constricting the vein and preventing
    expansion of the vein graft and resulting injury due to
    increased pressure.
We believe the key benefits of our eSVS MESH technology include:
•
Structural support designed to inhibit vessel expansion and
    resulting damage to the vessel, which can prevent a thickening
    of the vessel wall over time, or hyperplasia, and resulting
    graft failure.
•
Radial constriction designed to cause the diameter of the graft,
    or lumen, to be consistent in size and more closely match the
    diameter of the target coronary artery to which it is attached,
    thereby increasing blood flow velocities, reducing the potential
    for clot formation, and inhibiting vein wall thickening.
•
Compatibility with current CABG procedures, including on-pump or
    off-pump procedures, and open or endoscopic vein harvest
    methods. Except for the placement of our eSVS MESH on the
    saphenous vein graft, the surgical steps to use a saphenous vein
    graft with our eSVS MESH are the same as would be performed for
    any coronary artery bypass procedure utilizing unsupported
    saphenous vein grafts. We do not expect, nor have we seen, a
    significant increase in CABG procedure time due to eSVS MESH use.
We are also pursuing additional applications for our eSVS MESH,
    including applications for use in peripheral artery bypass
    surgery, for use with coronary allografts, and for use in
    arteriovenous, or AV, fistula dialysis applications.
Clinical
    Development of Our eSVS MESH
We have completed enrollment in a 90 patient multi-center
    clinical trial conducted outside the United States. The primary
    effectiveness endpoint of this trial is statistical
    non-inferiority of the patency of eSVS MESH vessels as compared
    to control vessels at nine-months post-implant. Effectiveness
    data, which is based on angiographic patency, is being collected
    at this time. Preliminary safety data has indicated that our
    eSVS MESH and implant procedure do not result in an increase in
    patient complications during or after surgery. We completed
    enrollment in this trial in July 2009, and as of March 1,
    2010, all 90 patients have been implanted for six months or
    more, 83 patients have been implanted for nine months or
    more, and 50 patients have been implanted for 12 months or
    more. This trial formed the basis for our CE Mark application
    submitted in February 2010.
We expect to receive CE Mark approval and to begin marketing our
    eSVS MESH in select European Union markets in the second half of
    2010. The FDA is reviewing our application for an IDE, which, if
    granted, will allow us to begin clinical trials of our eSVS MESH
    in the United States. We anticipate beginning enrollment in a
    United States IDE trial in the second half of 2010. We could be
    delayed by adverse clinical results or regulatory complications,
    and we may never receive marketing approval.
2
Table of Contents
Our
    Strategy
Our objective is to achieve significant market adoption of our
    eSVS MESH technology in CABG and other vascular applications.
    Key elements of our strategy to achieve this objective include
    the following:
•
Work with respected medical centers and key thought leaders to
    demonstrate and communicate the potential benefits of our eSVS
    MESH.
•
Commercialize our eSVS MESH in select European markets.
•
Obtain regulatory approval and commercialize our eSVS MESH in
    the United States.
•
Conduct trials to expand indications for our eSVS MESH.
Risks Associated
    with Our Business
Our business is subject to a number of risks discussed under the
    heading "Risk Factors" and elsewhere in this
    prospectus, including, but not limited to, the following:
•
We have a limited operating history, expect future losses, and
    may be unable to achieve or maintain profitability.
•
We may be unable to successfully complete our clinical trials
    and commercialize our eSVS MESH, or we may experience
    significant delays in doing so.
•
We may be unable to obtain market acceptance of our eSVS MESH.
•
Third-party payors may not provide sufficient coverage or
    reimbursement to healthcare providers for the use of our eSVS
    MESH.
•
We may be unable to protect our intellectual property rights,
    and claims of infringement or misappropriation of the
    intellectual property rights of others could prohibit us from
    commercializing our eSVS MESH.
•
We will be subject to U.S. and foreign government
    regulation.
You should carefully consider these factors, as well as all of
    the other information set forth in this prospectus, before
    making an investment decision.
Company
    Information
We were incorporated in Delaware in May 2007. Our principal
    executive offices are located at 3405 Annapolis Lane North,
    Suite 200, Minneapolis, MN 55447. Our telephone number is
(763) 235-3540,
and our website is www.kipsbaymedical.com. The information
    contained in or connected to our website is not incorporated by
    reference into, and should not be considered part of, this
    prospectus. Kips Bay
    Medical
®
,

    eSVS
®
,

    the Kips Bay Medical logo, and other trademarks or service marks
    of Kips Bay Medical, Inc. appearing in this prospectus are our
    property. Trade names, trademarks, and service marks of other
    companies appearing in this prospectus are the property of the
    respective holders.
3
Table of Contents
The
    Offering
Common stock offered by us
shares
Common stock to be outstanding immediately after this offering
shares
Use of
    Proceeds
We expect the net proceeds to us from this offering will be
    approximately $      million,
    after deducting the estimated underwriting discounts and
    commissions and estimated offering expenses. We intend to use
    the net proceeds from this offering to seek regulatory approval
    to market our eSVS MESH in the United States and abroad,
    including human clinical trials in the United States; develop
    and test additional applications of our eSVS MESH; make certain
    milestone payments for our acquired intellectual property; and
    for working capital and general corporate purposes. See
    "Use of Proceeds" on page 22 of this prospectus.
NASDAQ Global
    Market Listing
We intend to apply for the listing of our common stock on the
    Nasdaq Global Market under the symbol "KIPS."
Risk
    Factors
Investing in our common stock involves a high degree of risk.
    See "Risk Factors" on page 6 of this prospectus.
Outstanding
    Shares
The number of shares of our common stock that will be
    outstanding immediately after this offering is based on
    13,581,791 shares outstanding as of March 1, 2010 and
    excludes:
•
783,000 shares of common stock issuable upon the exercise
    of outstanding stock options as of March 1, 2010 at a
    weighted average exercise price of $4.01 per share; and
•
1,216,000 additional shares of common stock reserved and
    available for future issuances under our 2007 Long-Term
    Incentive Plan.
Except as otherwise noted, all information in this prospectus
    assumes no exercise of the underwriters' option to purchase
    additional shares.
4
Table of Contents
Summary Financial
    Data
The following table summarizes our financial data. We have
    derived the statements of operations data for the period from
    May 1, 2007 (inception) through December 31, 2007, the
    years ended December 31, 2008 and 2009, and the period from
    May 1, 2007 (inception) through December 31, 2009, and
    the balance sheet data as of December 31, 2009 from our
    audited financial statements appearing elsewhere in this
    prospectus. Our historical results are not necessarily
    indicative of the results that may be experienced in the future.
    You should read this data in conjunction with "Selected
    Financial Data," "Management's Discussion and
    Analysis of Financial Condition and Results of Operations,"
    and our financial statements and related notes, all included
    elsewhere in this prospectus.
Period from May 1,
Period from May 1,
2007 (Date of
2007 (Date of
Inception) to
Inception) to
December 31,
Year Ended December 31,
December 31,
2007
2008
2009
2009
Statements of Operations Data:
Operating expenses:
Research and development
$
196
$
2,635
$
3,004
$
5,835
Selling, general and administrative
381
754
779
1,914
Operating loss
(577
)
(3,389
)
(3,783
)
(7,749
)
Interest income
65
52
17
134
Interest expense
(164
)
(390
)
(181
)
(735
)
Impairment of available for sale securities
—
(85
)
—
(85
)
Change in fair value of investor stock purchase option
—
—
610
610
Net loss
$
(676
)
$
(3,812
)
$
(3,337
)
$
(7,825
)
Basic and diluted net loss per share
$
(0.16
)
$
(0.62
)
$
(0.30
)
Weighted average common shares
4,106,557
6,100,767
11,069,342
outstanding—basic and diluted
(In thousands, except share and per
    share amounts)
As of December 31, 2009
Actual
As Adjusted(1)
Balance Sheet Data:
Cash, cash equivalents and short term investments
$
3,417
$
Working capital
2,226
Total assets
3,740
Long-term debt, net
—
Total stockholders' equity
2,512
(In thousands
)
(1)
As adjusted to reflect the sale
    of           shares
    of our common stock in this offering at an assumed initial
    public offering price of $      per
    share, the midpoint of the range on the front cover of this
    prospectus, after deducting the estimated underwriting discounts
    and commissions and estimated offering expenses payable by us. A
    $1.00 increase or decrease in the assumed initial public
    offering price of $      per share
    would increase or decrease cash and cash equivalents, working
    capital, total assets and total stockholders' equity by
    $      million, assuming the
    number of shares offered by us, as set forth on the front cover
    of this prospectus, remains the same, and after deducting the
    estimated underwriting discounts and commissions and estimated
    offering expenses payable by us.
5
Table of Contents
Risk
    Factors
You should carefully consider the following information about
    risks, together with the other information contained in this
    prospectus, before making an investment in our common stock. If
    any of the circumstances or events described below actually
    arises or occurs, our business, results of operations, cash
    flows and financial condition could be harmed. In any such case,
    the market price of our common stock could decline, and you may
    lose all or part of your investment.
Risks Related to
    Our Business and Strategy
We have a
    limited operating history, expect future losses, and may be
    unable to achieve or maintain profitability.
We were founded on May 1, 2007 and to date we have engaged
    primarily in development of and initial clinical trials of our
    external saphenous vein support system, or eSVS MESH.
    Accordingly, we have limited operating history on which to base
    an evaluation of our business and prospects. As of
    December 31, 2009, we had an accumulated deficit of
    $9.2 million. We have incurred net losses in each year
    since our inception, and we expect to continue to incur
    operating losses for the foreseeable future. These losses, among
    other things, have had and will continue to have an adverse
    effect on our stockholders' equity and working capital.
    Because of the numerous risks and uncertainties associated with
    developing medical devices, we are unable to predict the extent
    of any future losses or when we will become profitable, if at
    all. To date, we have not generated any product revenues and we
    have financed our operations and internal growth primarily
    through private placements of equity securities and convertible
    promissory notes. Our prospects must be considered in light of
    the significant risks, expenses, and difficulties frequently
    encountered by medical device companies in their early stage of
    development. We may not be successful in addressing the risks we
    will encounter, and our failure to do so would likely harm our
    business and our ability to continue to operate.
If we are
    unable to successfully complete our clinical trials and
    commercialize our eSVS MESH in Europe, the United States, or
    other major markets or experience significant delays in doing
    so, our ability to generate revenue will be significantly
    delayed and our business will be harmed.
Our time and financial resources since our inception have
    largely been devoted to the development of our eSVS MESH. We
    have conducted only one human clinical trial of our eSVS MESH
    that was conducted outside the United States, and as of the date
    of this prospectus, our eSVS MESH has been implanted in only
    90 patients. Our ability to generate revenues depends on
    the receipt of regulatory approvals and the successful
    development and commercialization of our eSVS MESH in select
    markets in Europe, in the United States, and in other major
    markets. If we are unable to prove the safety and effectiveness
    of our eSVS MESH through clinical trials, we will not receive
    marketing approvals from the FDA or foreign health regulatory
    authorities, and we will be unable to sell our eSVS MESH. We
    have no other products ready for clinical testing or
    commercialization; therefore, our ability to remain in business
    would be doubtful if our eSVS MESH is not proven to be safe and
    effective. Even if our eSVS MESH receives CE Mark approval in
    the European Union, if the data from our clinical trials is not
    satisfactory, we may not proceed with our planned filing of
    applications for regulatory approvals in the United States or
    other major markets, or we may be forced to delay the filings.
    Even if we file an application for approval with satisfactory
    clinical data, the FDA or foreign regulatory authorities may not
    accept our filing, or may request additional information,
    including data from additional clinical trials. Delays in
    collecting or analyzing our clinical trial data could result in
    delays in filing regulatory applications with the FDA or other
    regulatory authorities. The FDA or foreign regulatory
    authorities may also approve our eSVS MESH for very limited
    purposes with many restrictions on its use or in limited sizes,
    may delay approvals, or ultimately may not grant marketing
    approval for our eSVS MESH. Even if we do receive CE Mark, FDA,
    or other foreign regulatory approval, we may be unable to
    successfully commercialize our eSVS MESH in the European Union,
    the United States, or other major markets, and our ability to
    generate revenue will be significantly impaired.
Our
    success depends on the coronary bypass graft market and the
    superior outcomes of coronary bypass surgery over competitive
    procedures, and such superior outcomes may not
    continue.
Physicians treat coronary artery disease with methods other than
    CABG procedures, including interventional
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techniques such as balloon angioplasty with or without the use
    of stents, pharmaceuticals, atherectomy catheters, and lasers.
    Several of these alternative treatments are widely accepted in
    the medical community and have a long history of use. In
    addition, technological advances may result in improvements in
    these alternative treatments or new therapies that produce
    superior treatment outcomes as compared to CABG surgery. The
    medical device industry is highly competitive and subject to
    rapid and profound technological change. Our success depends, in
    part, upon physicians continuing to perform a significant number
    of CABG procedures and our ability to achieve and maintain a
    competitive position in the development of technologies and
    products in the coronary artery bypass field. If physicians,
    patients, or hospitals opt to use our competitors'
    products, our commercial opportunity will be reduced and our
    potential revenues will suffer.
The
    market acceptance of new medical technologies is uncertain, and
    we may be unable to obtain market acceptance of our eSVS
    MESH.
Even if our clinical trials demonstrate that the use of our eSVS
    MESH provides equivalent or more effective results as compared
    to coronary bypass operations using only the unsupported
    saphenous vein grafts and if all regulatory approvals are
    obtained, the success of our eSVS MESH will depend upon the
    acceptance by cardiovascular and cardiothoracic surgeons of our
    eSVS MESH as equivalent or better than the current saphenous
    vein procedure and other available treatments. We believe that
    physicians' recommendations will be essential for the
    development and successful marketing of our eSVS MESH, and
    physicians will not begin to use our eSVS MESH unless they
    determine that it is a safe and effective alternative to current
    treatment methods. The degree of physician and market acceptance
    of our eSVS MESH will depend on a number of factors, including:
•
the perceived effectiveness of our eSVS MESH relative to its
    cost;
•
the prevalence and severity of any side effects;
•
potential advantages over alternative treatments;
•
effectiveness of our sales and marketing efforts;
•
publication in peer-reviewed medical journals of data regarding
    the successful use and longer term clinical benefits of our eSVS
    MESH;
•
development of new products and technologies by our competitors
    or new alternative treatments;
•
regulatory developments related to manufacturing, marketing and
    selling our eSVS MESH both within and outside the United States;
•
perceived liability risks arising out of the use of new products;
•
the willingness of physicians to adopt new technologies and the
    ability of physicians to acquire the skills necessary to use our
    eSVS MESH;
•
the strength of our sales and marketing support; and
•
the adequacy of third-party coverage or reimbursement.
If our eSVS MESH does not achieve an adequate level of
    acceptance by physicians, healthcare payors, and patients, we
    may not generate meaningful revenue and we may not become
    profitable. In addition, we have not yet determined pricing for
    our eSVS MESH and our pricing policies could adversely impact
    market acceptance of our eSVS MESH as compared to competing
    products and treatments. Any of the foregoing factors, or other
    factors, could limit or detract from market acceptance of our
    eSVS MESH. If our eSVS MESH is not accepted by the market, our
    business would be harmed.
We will
    be subject to intense competition and the risk of obsolescence
    if our competitors develop products superior to our eSVS
    MESH.
We face competition from established medical technology,
    pharmaceutical and biotechnology companies, as well as from
    academic institutions, government agencies, and private and
    public research institutions in the United States and abroad.
    The industry in which we operate has undergone, and is expected
    to continue to undergo, rapid and significant technological
    change, and we expect competition to intensify as technical
    advances are made. Our competitors may develop and commercialize
    medical device or pharmaceutical products that are safer or more
7
Table of Contents
effective, have fewer side effects or are less expensive than
    coronary artery bypass surgery. For example, we are aware of
    companies that are developing various other less-invasive
    technologies for treating cardiovascular disease, which could
    make our technology obsolete. We also compete in recruiting and
    retaining qualified scientific and management personnel,
    establishing clinical trial sites and patient registration for
    clinical trials, as well as in acquiring technologies and
    technology licenses complementary to our programs or
    advantageous to our business.
Furthermore, companies with significantly greater financial
    resources and expertise in research and development,
    manufacturing, pre-clinical testing, conducting clinical trials,
    obtaining regulatory approvals and marketing approved products
    than we have may be working on products similar to our eSVS
    MESH. Our eSVS MESH may not replace current surgical techniques
    and other products or techniques may render our eSVS MESH
    obsolete. In addition, our distributors will also face
    competition from established companies with significantly
    greater financial and marketing resources. Our competitors may
    produce more advanced products than ours or demonstrate superior
    safety of their products. Our ability to effectively compete
    depends on our ability to innovate successfully. There are few
    barriers that would prevent new or existing competitors from
    developing products that compete directly with ours. Demand for
    our eSVS MESH could be diminished by equivalent or superior
    products and technologies offered by competitors.
Smaller or early-stage companies may also prove to be
    significant competitors, particularly through collaborative
    arrangements with, or mergers with or acquisitions by, large and
    established companies or through the development of novel
    products and technologies.
Our competitive position also depends on:
•
obtaining any necessary United States or foreign marketing
    approvals;
•
widespread awareness, acceptance and adoption by the
    cardiovascular and cardiothoracic markets of our eSVS MESH;
•
product coverage and reimbursement from third-party payors,
    insurance companies and others;
•
published studies supporting the effectiveness and safety and
    long-term clinical benefit of our eSVS MESH;
•
properly identifying customer needs and delivering new products
    or product enhancements to address those needs;
•
limiting the time required from proof of feasibility to routine
    production;
•
limiting the timing and cost of regulatory approvals;
•
our ability to attract and retain qualified personnel;
•
the extent of our patent protection or our ability to otherwise
    develop proprietary products and processes;
•
our ability to maintain adequate manufacturing capacity and to
    source the materials and equipment required to manufacture our
    eSVS MESH; and
•
securing sufficient capital resources to expand our research and
    development, sales and marketing efforts, and manufacturing
    capacity.
If our eSVS MESH is not competitive based on these or other
    factors, our business would be harmed.
We have
    limited manufacturing resources and experience, and if our
    manufacturing facilities are unable to provide an adequate
    supply of our eSVS MESH, our growth could be limited and our
    business could be harmed.
We have limited experience in manufacturing our eSVS MESH and
    rely on outside vendors for several materials and processes. We
    currently manufacture our eSVS MESH for our clinical trials and
    for research and development purposes at our manufacturing
    facility in Minnesota. If our existing manufacturing facility
    experiences a disruption, we would have no other means of
    manufacturing our eSVS MESH until we are able to restore the
    manufacturing capability at our current facility or develop
    alternative manufacturing facilities.
If we are unable to produce sufficient quantities of our eSVS
    MESH for use in our current and planned clinical
8
Table of Contents
trials or for commercialization, or if our manufacturing process
    yields a substandard product, our regulatory, development and
    commercialization efforts would be delayed.
In order to produce our eSVS MESH in the quantities that would
    be required for commercialization, we would have to increase, or
    "scale up," the production process over the current
    level of production. Manufacturers often encounter difficulties
    in scaling up production, including problems involving yields,
    controlling and anticipating costs, quality control and
    assurance, supply and shortages of qualified personnel. If the
scaled-up
production process is not efficient or produces a product that
    does not meet quality and other standards, we may be unable to
    meet market demand and our revenues, business and financial
    prospects would be adversely affected. The contract vendors with
    which we are and will be developing relationships may not have
    the ability to produce the quantities of the materials needed
    for human clinical trials or commercial sales or may not do so
    at prices that allow our eSVS MESH to compete successfully in
    the market.
Additionally, any damage to or destruction of our facilities or
    our equipment, prolonged power outage or contamination at our
    facilities would significantly impair our ability to produce our
    eSVS MESH.
We depend
    upon third-party suppliers, making us vulnerable to supply
    problems and price fluctuations.
We rely on third-party suppliers to provide us certain
    components of our eSVS MESH. We depend on these suppliers to
    provide us with materials in a timely manner that meet our
    quality, quantity and cost requirements. These suppliers may
    encounter problems during manufacturing for a variety of
    reasons, including unanticipated demand from larger customers,
    failure to follow specific protocols and procedures, failure to
    comply with applicable regulations, equipment malfunction,
    quality or yield problems, and environmental factors, any of
    which could delay or impede their ability to meet our demand.
    Our reliance on these outside suppliers also subjects us to
    other risks that could harm our business, including:
•
interruption of supply resulting from modifications to, or
    discontinuation of, a supplier's operations;
•
delays in product shipments resulting from defects, reliability
    issues or changes in components from suppliers;
•
price fluctuations due to a lack of long-term supply
    arrangements for key components with our suppliers;
•
errors in manufacturing components, which could negatively
    impact the effectiveness or safety of our eSVS MESH or cause
    delays in shipment of our eSVS MESH;
•
discontinued production of components, which could significantly
    delay our production and sales and impair operating margins;
•
inability to obtain adequate supplies in a timely manner or on
    commercially acceptable terms;
•
difficulty locating and qualifying alternative suppliers for our
    sole-source supplies;
•
delays in production and sales caused by switching components,
    which may require product redesign and new regulatory
    submissions;
•
delays due to evaluation and testing of products from
    alternative suppliers and corresponding regulatory
    qualifications;
•
non-timely delivery of components due to our suppliers
    manufacturing products for a range of customers; and
•
inability of suppliers to fulfill orders and meet requirements
    because of supplier financial hardships.
Other than existing, unfulfilled purchase orders, our suppliers
    have no contractual obligations to supply us with, and we are
    not contractually obligated to purchase from them, any of our
    supplies. Any supply interruption from our suppliers or failure
    to obtain additional suppliers for any of the components used in
    our eSVS MESH would limit our ability to manufacture our eSVS
    MESH and could have a material adverse effect on our business,
    financial condition and results of operations. We have no reason
    to believe that any of our current suppliers could not be
    replaced if they were unable to deliver components to us in a
    timely manner or at an acceptable price and level of quality.
    However, if we lost one of these suppliers and were unable to
    obtain an alternate source on a timely basis or on terms
    acceptable to us, our production schedules could be delayed, our
    margins could be
9
Table of Contents
negatively impacted, and we could fail to meet our
    customers' demand. Our customers will rely upon our ability
    to meet committed delivery dates and any disruption in the
    supply of key components would adversely affect our ability to
    meet these dates and could result in legal action by our
    customers, cause us to lose customers or harm our ability to
    attract new customers, any of which could decrease our revenue
    and negatively impact our growth. In addition, to the extent
    that our suppliers use technology or manufacturing processes
    that are proprietary, we may be unable to obtain comparable
    materials or components from alternative sources.
Manufacturing operations are often faced with a supplier's
    decision to discontinue manufacturing a component, which may
    force us to make last time purchases, qualify a substitute part,
    or make a design change which may divert engineering time away
    from the development of new products.
Quality
    issues in our manufacturing processes could delay our clinical
    trials and our commercialization.
Even if we are able to contract with manufacturers for key
    materials or supplies, we may experience future manufacturing
    difficulties. Any difficulties in locating and hiring material
    manufacturers or in the ability of manufacturers to supply
    materials at the times and in the quantities we need, and at
    prices that allow us to compete, could have a material adverse
    effect on our business.
The production of our eSVS MESH must occur in a highly
    controlled, clean environment to minimize particles and other
    yield- and quality-limiting contaminants. In spite of stringent
    quality controls, weaknesses in process control or minute
    impurities in materials may cause a substantial percentage of
    defective products in a lot. In addition, we must meet certain
    lot release specifications before our eSVS MESH can be shipped
    to our clinical trial sites. If a particular lot fails to meet
    lot release specifications, we will not be able to ship that lot
    to our clinical trial sites. If we are not able to maintain
    stringent quality controls, if contamination problems arise or
    if we are not able to meet our lot release specifications, our
    clinical trials could be delayed, which would harm our business
    and our results of operations.
Our
    business is subject to risks relating to operating
    internationally.
As part of our product development and regulatory strategy, we
    intend to market our eSVS MESH internationally following CE Mark
    approval. There are a number of risks associated with conducting
    business internationally, including:
•
potential differences in treatment protocols and methods across
    the markets in which we expect to market our eSVS MESH;
•
potential differences in reimbursement levels and the
    requirements necessary to obtain such reimbursement;
•
general economic and political conditions in the markets in
    which we operate;
•
potential international conflicts, including terrorist acts;
•
potential increased costs associated with overlapping tax
    structures;
•
potential trade restrictions, exchange controls and legal
    restrictions on the repatriation of funds into the United States;
•
difficulties and costs associated with staffing and managing
    foreign operations, including risks of violations of local laws
    or the U.S. Foreign Corrupt Practices Act by employees
    overseas or the OECD Convention on Combating Bribery of Foreign
    Public Officials in International Business Transactions;
•
unexpected changes in regulatory requirements;
•
the difficulties of compliance with a wide variety of foreign
    laws and regulations;
•
unfavorable regulations in foreign jurisdictions regarding
    distributors;
•
the deferral of revenue recognition;
•
longer accounts receivable cycles in certain foreign countries;
    and
•
import and export licensing requirements.
10
Table of Contents
Any of these risks could adversely affect our international
    operations or financial results, which would harm our business.
We could
    become subject to product liability claims, product recalls,
    other field actions and warranty claims that could be expensive,
    divert management's attention, and harm our
    business.
We face an inherent risk of exposure to product liability claims
    in the event that the use of our eSVS MESH results or is alleged
    to have resulted in adverse effects to a patient. In many
    jurisdictions, producers of medical products are strictly liable
    for personal injuries caused by medical devices. A product
    liability claim against us, even if we are ultimately successful
    in defending it, could have a material adverse effect on our
    business, results of operations and reputation.
We may be held liable if our eSVS MESH causes injury or death or
    is found otherwise unsuitable during usage. Because our eSVS
    MESH is designed to be used in complex surgical procedures,
    defects could result in a number of complications, including
    serious injury or death. It is also possible that defects in the
    design, manufacture or labeling of our eSVS MESH might
    necessitate a product recall or other field corrective action,
    which may result in warranty claims beyond our expectations and
    may harm our reputation. A product liability claim, regardless
    of its merit or eventual outcome, could result in significant
    legal defense costs. The coverage limits of our insurance
    policies may not be adequate to cover future claims. We may be
    unable to maintain product liability insurance in the future at
    satisfactory rates or with adequate amounts. A product liability
    claim, any product recalls or other field actions or excessive
    warranty claims, whether arising from defects in design or
    manufacture or otherwise, could divert management's
    attention from our core business, be expensive to defend and
    result in sizable damage awards against us, any of which could
    harm our reputation and business.
If
    third-party payors do not provide sufficient coverage or
    reimbursement to healthcare providers for the use of our eSVS
    MESH, our acceptance in the marketplace would be
    harmed.
The availability of insurance coverage and reimbursement for
    newly approved medical devices and procedures is uncertain. Our
    success depends upon the use of our eSVS MESH and whether
    third-party insurance coverage and reimbursement for the use of
    this product is available.
Our success in international markets depends upon the
    eligibility of reimbursement for our eSVS MESH through
    government-sponsored healthcare payment systems and third-party
    payors. Reimbursement and healthcare payment systems in
    international markets vary significantly by country and, within
    some countries, by region. In many international markets,
    payment systems may control reimbursement for procedures
    performed using new products as well as procurement of these
    products. In addition, as economies of emerging markets develop,
    these countries may implement changes in their healthcare
    delivery and payment systems. Furthermore, healthcare cost
    containment efforts similar to those underway in the United
    States are prevalent in many of the other countries in which we
    intend to sell our eSVS MESH and these efforts are expected to
    continue. Market acceptance of our eSVS MESH in a particular
    country may depend on the availability and level of
    reimbursement in that country. In the event that our customers
    are unable to obtain adequate reimbursement for our eSVS MESH in
    international markets in which we are seeking to sell our eSVS
    MESH, market acceptance of our eSVS MESH would be adversely
    affected.
In the United States, our eSVS MESH would be purchased primarily
    by medical institutions, which would then bill various
    third-party payors, such as the Centers for Medicare &
    Medicaid Services, or CMS, which administer the Medicare
    program, and other government programs and private insurance
    plans, for the healthcare services provided to their patients.
    The process involved in applying for coverage and incremental
    reimbursement from CMS is lengthy and expensive. Even if our
    eSVS MESH receives FDA and other regulatory approval, it may not
    be granted coverage and reimbursement in the foreseeable future,
    if at all. Moreover, many private payors look to CMS in setting
    their reimbursement policies and amounts. If CMS or other
    agencies limit coverage or decrease or limit reimbursement
    payments for doctors and hospitals, this may affect coverage and
    reimbursement determinations by many private payors.
CMS may not provide coverage and reimbursement for our eSVS
    MESH. If a medical device does not receive incremental
    reimbursement from CMS, then a medical institution would have to
    absorb the cost of our eSVS
11
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MESH as part of the cost of the procedure in which the products
    are used. Acute care hospitals are now generally reimbursed by
    CMS for inpatient operating costs under a Medicare hospital
    inpatient prospective payment system. Under the Medicare
    hospital inpatient prospective payment system, acute care
    hospitals receive a fixed payment amount for each covered
    hospitalized patient based upon the Diagnosis-Related Group, or
    DRG, to which the inpatient stay is assigned, regardless of the
    actual cost of the services provided. At this time, we do not
    know the extent to which medical institutions would consider
    insurers' payment levels adequate to cover the cost of our
    eSVS MESH. Failure by hospitals and physicians to receive an
    amount that they consider to be adequate reimbursement for
    procedures in which our eSVS MESH is used could deter them from
    purchasing our eSVS MESH and limit our revenue growth. In
    addition, pre-determined DRG payments may decline over time,
    which could deter medical institutions from purchasing our eSVS
    MESH. If medical institutions are unable to justify the costs of
    our eSVS MESH, they may refuse to purchase it, which would
    significantly harm our business.
We may
    not be able to attract and retain the technical, regulatory, and
    sales personnel necessary for our success, which may divert
    management's attention and negatively impact our
    operations.
We are highly dependent on our senior management, specifically
    Manny Villafaña, our Chairman and Chief Executive Officer,
    and Michael Winegar, our Chief Operating Officer and Vice
    President of Regulatory Affairs. The loss of services of either
    of these individuals would impair our ability to commercialize
    our eSVS MESH and develop new products and would harm our
    business. Our success will depend on our ability to retain our
    senior management and to attract and retain qualified personnel
    in the future. Competition for senior management personnel, as
    well as clinical and regulatory specialists, engineers and sales
    personnel, is intense and we may not be able to retain our
    personnel. The loss of a member of our senior management or our
    professional staff would require the remaining senior executive
    officers to divert immediate and substantial attention to
    seeking a replacement. Each of our senior officers may terminate
    his employment at any time without notice and without cause or
    good reason. We do not carry key person life insurance on any of
    our employees. If we lose the services of any key personnel, our
    business, financial condition and results of operations may
    suffer.
We will
    need to increase the size of our organization and we may
    experience difficulties managing growth. If we are unable to
    manage the anticipated growth of our business, our future
    revenue and operating results may be adversely
    affected.
We expect to significantly expand our manufacturing operations,
    sales support and marketing staff, and administrative and
    financial resources to meet anticipated growth in demand for our
    eSVS MESH. We may face difficulties in recruiting, training,
    managing and retaining an adequate number of qualified personnel
    to support this growth. Rapid expansion in personnel may mean
    that less experienced people could be manufacturing and
    providing clinical and sales and marketing support for our eSVS
    MESH, and managing our administrative and financial functions,
    which could result in unanticipated costs and disruptions to our
    operations. If we cannot scale and manage our business
    appropriately, our anticipated growth may be impaired and our
    financial results will suffer.
Becoming
    a public company will cause us to incur increased costs and
    demands on our management and divert management's attention
    from our core business.
The obligations of being a public company, including substantial
    public reporting and auditing obligations, will require
    significant additional expenditures, place additional demands on
    our management and divert management's time and attention
    away from our core business. These additional obligations will
    require us to hire additional personnel in order to ensure
    compliance with the regulatory requirements of the Securities
    and Exchange Commission and the NASDAQ Global Market. We will be
    required to report on our internal controls, as required by
    Section 404 of the Sarbanes-Oxley Act, beginning with our
    annual report for the year ending December 31, 2011. We
    cannot be certain as to the timing of completion of our
    evaluation, testing and remediation actions relating to our
    internal controls or the impact of the same on our operations.
    Our management may not be able to effectively and timely
    implement controls and procedures that adequately respond to the
    increased regulatory compliance and reporting requirements that
    will be applicable to us as a public company. If we fail to
    staff our accounting and finance function adequately or maintain
    internal controls adequate to meet the demands that will be
    placed upon us as a public company, including the requirements
    of the Sarbanes-Oxley Act, we may be unable
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to report our financial results accurately or in a timely manner
    and our business and stock price may suffer. The costs of being
    a public company, as well as diversion of management's time
    and attention, may harm our business, financial condition and
    results of operations.
Risks Related to
    Our Intellectual Property
If we are
    unable to protect our intellectual property rights, our ability
    to compete will be harmed.
We rely upon patents, trade secret laws and confidentiality
    agreements to protect our technology. We have six patent
    applications pending in the United States and nine patent
    applications pending in countries outside the United States on
    our eSVS MESH. We also have one international patent application
    pending, which gives us the opportunity to file in more
    individual countries. Some of our pending patent applications
    have been examined and currently stand rejected. We will
    continue to pursue obtaining patents from these applications,
    but it is possible that our pending patent applications may not
    issue as patents or, if issued, may not issue in a form that
    will be advantageous to us. We expect to launch our eSVS MESH in
    Europe before any of our pending European patent applications
    issue as patents. Any patents we obtain in the future might be
    invalidated or circumvented by third parties. If any challenges
    are successful, competitors might be able to market products and
    use manufacturing processes that are substantially similar to
    ours. We may not be able to prevent the unauthorized disclosure
    or use of our technical knowledge or other trade secrets by
    consultants, vendors or former or current employees, despite the
    existence generally of confidentiality agreements and other
    contractual restrictions. Monitoring unauthorized use and
    disclosure of our intellectual property is difficult, and we do
    not know whether the steps we have taken to protect our
    intellectual property will be adequate. In addition, the laws of
    many foreign countries may not protect our intellectual property
    rights to the same extent as the laws of the United States. To
    the extent that our intellectual property protection is
    inadequate, we are exposed to a greater risk of direct
    competition. In addition, competitors could purchase our eSVS
    MESH and attempt to replicate some or all of the competitive
    advantages we derive from our development efforts or attempt to
    design around our protected technology. If our intellectual
    property is not adequately protected against competitors'
    products and methods, our competitive position could be
    adversely affected, as could our business.
The laws of some foreign countries may not protect our
    intellectual property rights to the same extent as do the laws
    of the United States. In the event a competitor infringes upon
    our patent or other intellectual property rights, enforcing
    those rights may be difficult and time consuming. Even if
    successful, litigation to enforce our intellectual property
    rights or to defend our patents against challenge could be
    expensive and time consuming and could divert our
    management's attention. We may not have sufficient
    resources to enforce our intellectual property rights or to
    defend our patents against a challenge.
We also rely upon trade secrets, technical know-how and
    continuing technological innovation to develop and maintain our
    competitive position. We require our employees to execute
    appropriate confidentiality and
assignment-of-inventions
agreements with us. These agreements typically provide that all
    materials and confidential information developed or made known
    to the individual during the course of the individual's
    relationship with us be kept confidential and not disclosed to
    third parties except in specific circumstances and that all
    inventions arising out of the individual's relationship
    with us shall be our exclusive property. Additionally, we seek
    to have our consultants and advisors execute similar
    confidentiality and
assignment-of-inventions
agreements with us, but in some instances these agreements have
    not included
assignment-of-invention
provisions. These agreements may be breached, and in some
    instances, we may not have an appropriate remedy available for
    breach of the agreements. Furthermore, our competitors may
    independently develop substantially equivalent proprietary
    information and techniques, reverse engineer our information and
    techniques, or otherwise gain access to our proprietary
    technology.
Claims of
    infringement or misappropriation of the intellectual property
    rights of others could prohibit us from commercializing our eSVS
    MESH and harm our business.
The medical device industry has been characterized by extensive
    litigation regarding patents and other intellectual property
    rights, and companies in the industry have used intellectual
    property litigation to gain a competitive advantage. We may
    become a party to patent infringement claims and litigation or
    interference proceedings
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declared by the U.S. Patent and Trademark Office to
    determine the priority of inventions. The defense and
    prosecution of these matters are both costly and time consuming.
Additionally, we may need to commence proceedings against others
    to enforce our patents, to protect our trade secrets or know-how
    or to determine the enforceability, scope and validity of the
    proprietary rights of others. These proceedings would result in
    substantial expense to us and significant diversion of effort by
    our technical and management personnel.
We are aware of patents issued to third parties that contain
    subject matter related to our technology. These or other third
    parties may assert that our eSVS MESH infringes the claims in
    their patents or seek to expand their patent claims to cover
    aspects of our eSVS MESH. An adverse determination in litigation
    or interference proceedings to which we may become a party could
    subject us to significant liabilities or require us to seek
    licenses. In addition, if we are found to willfully infringe
    third-party patents, we could be required to pay treble damages
    in addition to other penalties. Although patent and intellectual
    property disputes in the medical device area have often been
    settled through licensing or similar arrangements, costs
    associated with these arrangements may be substantial and could
    include ongoing royalties. We may be unable to obtain necessary
    licenses on satisfactory terms, if at all. If we do not obtain
    necessary licenses, we may be required to redesign our eSVS MESH
    to avoid infringement, and it may not be possible to do so
    effectively. Adverse determinations in a judicial or
    administrative proceeding or failure to obtain necessary
    licenses could cause us to incur significant costs, place
    significant strain on our resources, divert management's
    attention from our business and harm our reputation and prevent
    us from commercializing our eSVS MESH or any other product we
    may develop, which would have a significant adverse impact on
    our business. Some of our competitors may be able to sustain the
    costs of complex patent litigation more effectively than we can
    because they have substantially greater resources.
Risks Related to
    Regulatory Approval and Other Government Regulations
We will
    be subject to government regulation, and we may not receive
    approval for our eSVS MESH on a timely basis, if at
    all.
Our eSVS MESH, product development activities and manufacturing
    processes are, and will continue to be, subject to extensive and
    rigorous scrutiny and 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 or
    approval for new medical products from the FDA is costly and
    time consuming, and there can be no assurance that such approval
    will be granted for our eSVS MESH on a timely basis, if at all,
    or that the FDA review will not involve delays that would
    adversely affect our ability to commercialize our eSVS MESH.
    Even if regulatory clearance or approval to market a product is
    obtained from the FDA, this clearance or approval may entail
    limitations on the indicated uses of the product. Marketing
    clearance or approval 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 a Pre-Market Approval, or PMA,
    application with regard to our eSVS MESH, and there is no
    assurance whatsoever that approval will be obtained. Even if
    approval is obtained, the process of obtaining a PMA is
    expensive, uncertain and lengthy, frequently requiring several
    years from the date of submission. Changing FDA policies and
    requirements for PMA products may add additional uncertainty.
    Significant delay or failure to obtain FDA approval to market
    our eSVS MESH would harm our business.
The FDA
    may not approve our investigational device exemption application
    for our eSVS MESH, which would prevent us from conducting our
    clinical trials in the United States, and even if the FDA does
    grant such approval, our clinical trials may be more costly and
    burdensome than we currently anticipate, which would limit or
    delay our ability to complete clinical trials and ultimately
    market our eSVS MESH in the United States.
The FDA is reviewing our application for an investigational
    device exemption, or IDE, which, if granted, will allow us to
    begin clinical trials of our eSVS MESH in the United States. The
    FDA has not yet approved our application for an IDE and may
    never grant such approval.
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If the FDA approves our IDE application, the clinical trials we
    conduct may have unanticipated complications and delays and may
    be more costly than we currently anticipate. The FDA may approve
    our IDE application with conditions relating to the scope or
    design of our clinical trials for which we have not planned.
    These conditions may require us to collect additional data,
    enroll more patients, spend more time and expend more resources
    than we currently anticipate, and these conditions may make a
    clinical trial in the United States more costly and time
    consuming than we currently plan. Any unanticipated costs and
    length of U.S. clinical trials would delay our ability to
    market our eSVS MESH in the United States, which would harm our
    business.
If the FDA does not approve our IDE application, we would be
    unable to conduct clinical trials of our eSVS MESH in the United
    States. If our IDE application is not approved and we are unable
    to conduct U.S. clinical trials, we would not be able to
    submit a PMA application and we would be unable to market our
    eSVS MESH in the United States, which would have an adverse
    effect on our business.
Even if
    our eSVS MESH is approved by regulatory authorities, if we fail
    to comply with ongoing regulatory requirements, or if we
    experience unanticipated problems with our eSVS MESH, it could
    be subject to restrictions or withdrawal from the
    market.
Any product for which we obtain marketing approval, along with
    the manufacturing processes, post-approval clinical data and
    promotional activities for such product, will be subject to
    continual review and periodic inspections by the FDA and other
    regulatory bodies. Even if regulatory approval of our eSVS MESH
    is granted, the approval may be subject to limitations on the
    indicated uses for which the product may be marketed or contain
    requirements for costly post-marketing testing and surveillance
    to monitor the safety or effectiveness of the product. Later
    discovery of previously unknown problems with our eSVS MESH,
    including unanticipated adverse events or adverse events of
    unanticipated severity or frequency, manufacturer or
    manufacturing processes, or failure to comply with regulatory
    requirements, may result in restrictions on such products or
    manufacturing processes, withdrawal of the products from the
    market, voluntary or mandatory recall, fines, suspension of
    regulatory approvals, product seizures, injunctions or the
    imposition of civil or criminal penalties.
We will
    be highly dependent on third-party institutions to conduct our
    clinical testing, and the results of such testing may delay or
    prevent regulatory approval of our eSVS MESH.
We rely on clinical investigators and clinical trial sites to
    enroll patients in our clinical trials and other third parties
    to manage our trials and to perform related data collection and
    analysis. However, we are not able to control the amount and
    timing of resources that clinical trial sites devote to our
    clinical trials. If these clinical investigators and clinical
    trial sites fail to enroll a sufficient number of patients in
    our clinical trials or fail to ensure compliance by patients
    with clinical protocols, we will be unable to complete our
    planned trials, which could prevent us from obtaining regulatory
    approvals for our eSVS MESH. Our agreements with clinical
    investigators and clinical trial sites for clinical testing
    place substantial responsibilities on these parties and, if
    these parties fail to perform as expected, our planned trials
    could be delayed or terminated. If these clinical investigators,
    clinical trial sites, or other third parties do not carry out
    their contractual duties or obligations or fail to meet expected
    deadlines, or if the quality or accuracy of the clinical data
    they obtain is compromised due to their failure to adhere to our
    clinical protocols, the FDA's good clinical practice
    regulations or for other reasons, our clinical trials may be
    extended, delayed or terminated, and we may be unable to obtain
    regulatory approval for, or successfully commercialize, our eSVS
    MESH.
In addition, the data obtained from human clinical testing is
    subject to varying interpretations that could delay, limit or
    prevent regulatory approval, and delays or rejection may be
    encountered based upon changes in FDA policy for device approval
    during the period of development.
Our
    facilities will be subject to inspection by the FDA and
    international authorities, and we could face penalties if we are
    found to be non-compliant with the regulations of the FDA or
    international authorities.
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
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determination that we are in material violation of such
    regulations could lead to the imposition of civil penalties,
    including fines, product recalls, product seizures 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 eSVS MESH.
    The FDA could also limit or prevent the manufacture or
    distribution of our eSVS MESH 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
    promotional and marketing activities will be subject to
    regulation by the FDA and international authorities, and we
    could face severe penalties if we are found to be promoting our
    eSVS MESH for an unapproved use.
If the FDA or international authorities determine that our
    promotional materials or activities constitute promotion of our
    eSVS MESH for an unapproved use, it could demand that we cease
    the use of or modify our promotional materials or subject us to
    regulatory enforcement actions, including the issuance of a
    warning letter, injunction, civil fine and criminal penalties.
    It is also possible that other federal, state or foreign
    enforcement authorities might take action if they consider
    promotional or other materials to constitute promotion of our
    eSVS MESH for an unapproved use, which could result in
    significant fines or penalties under other statutory
    authorities, such as laws prohibiting false claims for
    reimbursement.
Our
    success will also be dependent on complying with foreign
    regulatory requirements, and our inability to do so could result
    in sales of our eSVS MESH being restricted
    internationally.
Our revenues will initially be dependent upon sales of our eSVS
    MESH outside the United States. Foreign regulatory bodies have
    established varying regulations governing product standards,
    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 inability or failure of such foreign
    distributors to comply with varying foreign regulation or the
    imposition of new regulations could restrict the sale of our
    eSVS MESH internationally and thereby harm our business.
Proposed
    legislation may negatively affect coverage and reimbursement
    levels for our eSVS MESH.
Even if third-party payors provide adequate coverage and
    reimbursement for our eSVS MESH, adverse changes in third-party
    payors' general policies toward reimbursement could
    preclude market acceptance for our eSVS MESH and harm our
    potential sales and revenue growth, which in turn would harm our
    business. Recently, healthcare reform legislation was signed
    into law in the United States and we expect that there will
    continue to be legislative proposals for governmental controls
    over healthcare in the United States and other countries. Some
    third-party payors also require pre-approval of coverage or
    companies to demonstrate the superiority of their product before
    they will reimburse healthcare providers who use such devices or
    procedures.
The trend toward managed healthcare in the United States and
    other countries and legislation intended to reduce the cost of
    government insurance programs could significantly influence the
    purchase of healthcare services and products, and may result in
    necessary price reductions for our eSVS MESH or the exclusion of
    our eSVS MESH from reimbursement programs. It is uncertain
    whether our eSVS MESH will be viewed as sufficiently
    cost-effective to warrant adequate coverage and reimbursement
    levels.
Our
    operations involve hazardous materials, and we must comply with
    environmental laws and regulations, which can be expensive, time
    consuming, and may impair our operations.
We are subject to a variety of federal, state and local
    regulations relating to the use, handling, storage, disposal and
    human exposure to hazardous and toxic materials. We could incur
    costs, fines and civil and criminal sanctions, third-party
    property damage or personal injury claims, or could be required
    to incur substantial investigation or remediation costs, if we
    were to violate or become liable under environmental laws. We do
    not have insurance for environmental liabilities and liability
    under environmental laws can be joint and several and without
    regard to comparative fault. Environmental laws could become
    more stringent over time, imposing greater compliance costs
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and increasing risks and penalties associated with violations,
    which could harm our business. Compliance with current or future
    environmental and safety laws and regulations could restrict our
    ability to expand our facilities, impair our research,
    development or production efforts, or require us to incur other
    significant expenses. There can be no assurance that violations
    of environmental laws or regulations will not occur in the
    future as a result of the inability to obtain permits, human
    error, accident, equipment failure or other causes.
Risks Related to
    Our Common Stock and this Offering
Because
    there has not been a public market for our common stock and our
    stock price may be volatile, you may not be able to resell your
    shares at or above the initial public offering price.
Prior to this initial public offering there has not been a
    public market for our common stock. We cannot predict the extent
    to which investors' interests will lead to an active
    trading market for our common stock or whether the market price
    of our common stock will be volatile following this offering. If
    an active trading market does not develop or is not sustained,
    you may have difficulty selling any of our common stock that you
    buy. The initial public offering price for our common stock will
    be determined by negotiations between representatives of the
    underwriters and us and may not be indicative of prices that
    will prevail in the open market following this offering.
    Consequently, you may not be able to sell our common stock at
    prices equal to or greater than the price you paid in this
    offering. In addition to the risk factors discussed elsewhere in
    this section, the following factors, most of which are outside
    of our control, could cause the market price of our common stock
    to decrease significantly from the price you pay in this
    offering:
•
inconclusive or failed clinical trial outcomes of our eSVS MESH;
•
failure to achieve market acceptance for our eSVS MESH;
•
inability to manufacture our eSVS MESH in adequate quantities or
    to commercial standards;
•
departure of key personnel;
•
inability to hire, train and retain qualified personnel to
    support our growth;
•
variations in our quarterly operating results or those of
    companies that are perceived to be similar to us;
•
announcements by our competitors of significant technological
    developments;
•
changes in governmental regulations and standards;
•
litigation related to patent infringement and product liability
    claims;
•
changes to financial estimates by equity research analysts;
•
sales of common stock or other securities by us in the future;
•
decreases in market valuations of similar companies; and
•
fluctuations in stock market prices and volumes.
Each of these factors could cause the market price of our stock
    to decline, and you may lose some or all of your investment.
In addition, the stock markets have been extremely volatile.
    Securities class action litigation is often initiated against a
    company following a period of volatility in the market price of
    the company's securities. If class action litigation is
    initiated against us, we would incur substantial costs and our
    management's attention would be diverted from our
    operations.
If equity
    research analysts do not publish research or reports about our
    business or if they issue unfavorable research or downgrade our
    common stock, the price of our common stock could
    decline.
The trading market for our common stock will rely in part on the
    research and reports that equity research analysts publish about
    us and our business. We do not control these analysts. Equity
    research analysts may elect not to provide research coverage of
    our common stock, which may adversely affect the market price of
    our common stock. If equity research analysts do provide
    research coverage of our common stock, the price of our common
    stock could decline if one or more of these analysts downgrade
    our common stock or if they issue other
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unfavorable commentary about us or our business. If one or more
    of these analysts ceases coverage of our company, we could lose
    visibility in the market, which in turn could cause our stock
    price to decline.
Future
    sales of our common stock by our existing stockholders could
    cause our stock price to decline and cause you to lose part or
    all of your investment.
If our stockholders sell substantial amounts of our common stock
    in the public market, the market price of our common stock could
    decrease significantly. The perception in the public market that
    our stockholders might sell shares of our common stock could
    also depress the market price of our common stock. Substantially
    all of our existing stockholders prior to this offering are
    subject to
lock-up
agreements that restrict their ability to transfer their shares
    of our common stock for at least 180 days after the date of
    this prospectus, subject to certain exceptions. Upon expiration
    of the
lock-up
period, shares of our common stock will be eligible for sale in
    the public market. In addition, we intend to file registration
    statements with the SEC covering (a) any shares of our
    common stock acquired upon option exercises prior to the closing
    of this offering, (b) all of the shares subject to options
    outstanding, but not exercised, as of the closing of this
    offering and (c) all of the shares available for future
    issuance under our stock incentive plan upon the closing of this
    offering. The market price of shares of our common stock may
    decrease significantly when the restrictions on resale by our
    existing stockholders lapse and our stockholders, warrant
    holders and option holders are able to sell shares of our common
    stock into the market. A decline in the price of shares of our
    common stock might impede our ability to raise capital through
    the issuance of additional shares of our common stock or other
    equity securities, and may cause you to lose part or all of your
    investment in our shares of common stock.
We have
    broad discretion in the use of the proceeds of this offering and
    may apply the proceeds in ways with which you do not agree or
    which cause our stock price to decline.
A significant portion of our net proceeds from this offering
    will be used, as determined by management in its sole
    discretion, for working capital and general corporate purposes.
    Our management will have broad discretion over the use and
    investment of these net proceeds, and, accordingly, you will
    have to rely upon the judgment of our management with respect to
    our use of these net proceeds, with only limited information
    concerning management's specific intentions. You will not
    have the opportunity, as part of your investment decision, to
    assess whether we use the net proceeds from this offering
    appropriately. We may place the net proceeds in investments that
    do not produce income or that lose value, which may cause our
    stock price to decline.
Our
    directors, executive officers and significant stockholders will
    continue to have substantial control over us after this offering
    and could limit your ability to influence the outcome of key
    transactions, including changes of control.
We anticipate that our directors and executive officers and
    their affiliated entities will, in the aggregate, beneficially
    own     % of our outstanding common
    stock following the completion of this offering, assuming the
    underwriters do not exercise their option to purchase additional
    shares. In addition, Kips Bay Investments, LLC will beneficially
    own     % and Mr. Villafaña,
    our Chairman and Chief Executive Officer, will beneficially
    own     % of our outstanding common
    stock following the completion of this offering, and together
    will be able to control or influence significantly all matters
    requiring approval by our stockholders. Our directors, executive
    officers, significant stockholders and affiliated entities, if
    acting together, would be able to control or influence
    significantly all matters requiring approval by our
    stockholders, including the election of directors and the
    approval of mergers or other significant corporate transactions.
    These stockholders may have interests that differ from yours,
    and they may vote in a way with which you disagree and that may
    be adverse to your interests. The concentration of ownership of
    our common stock may have the effect of delaying, preventing or
    deterring a change of control of our company, could deprive our
    stockholders of an opportunity to receive a premium for their
    common stock as part of a sale of our company, and may affect
    the market price of our common stock. This concentration of
    ownership of our common stock may also have the effect of
    influencing the completion of a change in control that may not
    necessarily be in the best interests of all of our stockholders.
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Our
    charter documents and Delaware law may inhibit a takeover that
    stockholders consider favorable.
Upon the closing of this offering, provisions of our certificate
    of incorporation and amended and restated bylaws and applicable
    provisions of Delaware law may make it more difficult for or
    prevent a third party from acquiring control of us without the
    approval of our board of directors. These provisions:
•
set limitations on the removal of directors;
•
limit who may call a special meeting of stockholders;
•
establish advance notice requirements for nominations for
    election to our board of directors or for proposing matters that
    can be acted upon at stockholder meetings;
•
do not permit cumulative voting in the election of our
    directors, which would otherwise permit less than a majority of
    stockholders to elect directors;
•
prohibit stockholder action by written consent unless unanimous,
    thereby requiring all stockholder actions to be taken at a
    meeting of our stockholders; and
•
provide our board of directors the ability to designate the
    terms of and issue a new series of preferred stock without
    stockholder approval.
In addition, Section 203 of the Delaware General
    Corporation Law generally limits our ability to engage in any
    business combination with certain persons who own 15% or more of
    our outstanding voting stock or any of our associates or
    affiliates who at any time in the past three years have owned
    15% or more of our outstanding voting stock. These provisions
    may have the effect of entrenching our management team and may
    deprive you of the opportunity to sell your shares to potential
    acquirers at a premium over prevailing prices. This potential
    inability to obtain a control premium could reduce the price of
    our common stock.
You will
    experience immediate and substantial dilution in the net
    tangible book value of the common stock you purchase in this
    offering.
If you purchase common stock in this offering, you will incur
    immediate dilution of $      in as
    adjusted net tangible book value per share of common stock,
    based on an assumed initial public offering price of $ per
    share, the midpoint of the range on the front cover of this
    prospectus, because the price that you pay will be substantially
    greater than the as adjusted net tangible book value per share
    of common stock that you purchase. This dilution is due in large
    part to the fact that our earlier investors paid substantially
    less than the price of the shares being sold in this offering
    when they purchased their shares of our common stock. In
    addition, if outstanding options to purchase our common stock
    are exercised, you will experience additional dilution.
We do not
    intend to declare dividends on our common stock after this
    offering, and you should not expect to receive dividends on your
    common stock for the foreseeable future.
We currently intend to retain all future earnings for the
    operation and expansion of our business and, therefore, do not
    anticipate declaring or paying cash dividends on our common
    stock in the foreseeable future. Any payment of cash dividends
    on our common stock will be at the discretion of our board of
    directors and will depend upon our results of operations,
    earnings, capital requirements, financial condition, future
    prospects, contractual restrictions and other factors deemed
    relevant by our board of directors. Therefore, you should not
    expect to receive dividend income from shares of our common
    stock.
We
    anticipate future losses and may require additional financing,
    and our failure to obtain additional financing when needed could
    force us to delay, reduce or eliminate our product development
    programs or commercialization efforts.
We expect to incur losses for the foreseeable future, and we may
    require financing in addition to the proceeds of this offering
    in order to satisfy our capital requirements. In particular, we
    may require additional capital in order to continue to conduct
    the research and development and obtain regulatory clearances
    and approvals necessary to bring any future products to market
    and to establish effective marketing and sales capabilities for
    existing and future products. Additional funds may not be
    available when we need them on terms that are acceptable to us,
    or
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at all. If adequate funds are not available on a timely basis,
    we may terminate or delay the development of our eSVS MESH, or
    delay establishment of sales and marketing capabilities or other
    activities necessary to commercialize our eSVS MESH.
Our future capital requirements will depend on many factors,
    including:
•
the costs of expanding our distribution network and our
    manufacturing operations;
•
the degree of success we experience in commercializing our eSVS
    MESH;
•
the number and types of future products we develop and
    commercialize;
•
the costs, timing and outcomes of regulatory reviews associated
    with our future product candidates;
•
the costs of preparing, filing and prosecuting patent
    applications and maintaining, enforcing and defending
    intellectual property-related claims; and
•
the extent and scope of our general and administrative expenses.
Raising
    additional capital may cause dilution to our stockholders or
    restrict our operations.
To the extent that we raise additional capital through the sale
    of equity or convertible debt securities, your ownership
    interest will be diluted, and the terms may include liquidation
    or other preferences that adversely affect your rights as a
    stockholder. Debt financing, if available, may involve
    agreements that include covenants limiting or restricting our
    ability to take specific actions such as incurring additional
    debt, making capital expenditures or declaring dividends. Any of
    these events could adversely affect our ability to achieve our
    product development and commercialization goals and harm our
    business.
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Special Note
    Regarding Forward-Looking Statements
This prospectus, including the sections entitled
    "Prospectus Summary," "Risk Factors,"
    "Management's Discussion and Analysis of Financial
    Condition and Results of Operations" and
    "Business," contains forward-looking statements that
    involve risks and uncertainties. In some cases, you can identify
    forward-looking statements by the following words:
    "anticipate," "believe,"
    "continue," "could," "estimate,"
    "expect," "intend," "may,"
    "ongoing," "plan," "potential,"
    "predict," "project," "should,"
    "will," "would," or the negative of these
    terms or other comparable terminology, although not all
    forward-looking statements contain these words. These statements
    involve known and unknown risks, uncertainties and other factors
    that may cause our or our industry's results, levels of
    activity, performance or achievements to be materially different
    from the information expressed or implied by these
    forward-looking statements. Although we believe that we have a
    reasonable basis for each forward-looking statement contained in
    this prospectus, we caution you that these statements are based
    on a combination of facts and factors currently known by us and
    our projections of the future, about which we cannot be certain.
    Many important factors affect our ability to achieve our
    objectives, including:
•
our ability to commercialize our eSVS MESH technology;
•
our ability to obtain and maintain foreign and domestic
    regulatory approval of our eSVS MESH technology;
•
our ability to obtain coverage and reimbursement from
    third-party payors for our eSVS MESH technology and the extent
    of such coverage;
•
the successful development of our distribution and marketing
    capabilities;
•
our ability to attract and retain scientific, regulatory, and
    sales and marketing support personnel;
•
our ability to obtain and maintain intellectual property
    protection for our eSVS MESH technology;
•
any future litigation regarding our business, including product
    liability claims;
•
changes in governmental laws and regulations relating to
    healthcare;
•
the availability and cost of third-party products and the
    ability of our suppliers to timely meet our demands;
•
changes affecting the medical device industry;
•
general and economic business conditions; and
•
the other risks described under "Risk Factors" in this
    prospectus.
These factors could cause actual results to differ materially
    from the results anticipated by these forward-looking
    statements. You should read these risk factors and the other
    cautionary statements made in this prospectus as being
    applicable to all related forward-looking statements wherever
    they appear in this prospectus. We cannot assure you that the
    forward-looking statements in this prospectus will prove to be
    accurate. Furthermore, if our forward-looking statements prove
    to be inaccurate, the inaccuracy may be material. In light of
    the significant uncertainties in these forward-looking
    statements, you should not regard these statements as a
    representation or warranty by us or any other person that we
    will achieve our objectives and plans in any specified time
    frame, if at all.
You should read this prospectus completely. Other than as
    required by law, we undertake no obligation to update these
    forward-looking statements, even though our situation may change
    in the future. We qualify all the forward-looking statements
    contained in this prospectus by the foregoing cautionary
    statements.
Information and management estimates contained in this
    prospectus concerning the medical device industry and the
    coronary artery bypass graft market, including our general
    expectations and market position, market opportunity and market
    share, are based on publicly available information, such as
    clinical studies, academic research reports and other research
    reports. The management estimates are also derived from our
    internal research, using assumptions made by us that we believe
    to be reasonable and our knowledge of the industry and markets
    in which we operate and expect to compete. None of the sources
    cited in this prospectus has consented to the inclusion of any
    data from its reports, nor have we sought their consent. Our
    internal research has not been verified by any independent
    source, and we have not independently verified any third-party
    information. In addition, while we believe the market position,
    market opportunity and market share information included in this
    prospectus is generally reliable, such information is inherently
    imprecise. Such data involves risks and uncertainties and are
    subject to change based on various factors, including those
    discussed under the heading "Risk Factors."
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Use of
    Proceeds
Assuming an initial public offering price of
    $      per share, the midpoint of the
    range on the front cover of this prospectus, we estimate our net
    proceeds from the sale
    of          shares
    of our common stock in this offering will be
    $      million, after deducting
    the estimated underwriting discounts and commissions and our
    estimated offering expenses payable by us.
If the underwriters exercise their option to purchase additional
    shares in full, we estimate that our net proceeds from this
    offering will be $      million,
    after deducting the estimated underwriting discounts and
    estimated offering expenses payable by us. A $1.00 increase or
    decrease in the assumed initial public offering price of
    $      per share would increase or
    decrease the net proceeds to us from this offering by
    $      million, assuming the
    number of shares offered by us, as set forth on the front cover
    of this prospectus, remains the same and after deducting the
    estimated underwriting discounts and commissions and estimated
    offering expenses payable by us.
We intend to use the net proceeds from this offering primarily
    for the following purposes:
•
approximately $15.0 million to fund the process of seeking
    regulatory approval to market our eSVS MESH in the United States
    and abroad, including human clinical trials in the United States;
•
approximately $      million to
    fund the development and testing of additional applications of
    our eSVS MESH;
•
from $5.0 million to $10.0 million to fund certain
    milestone payments payable to Medtronic, Inc. for the assignment
    of certain intellectual property rights to our eSVS
    MESH; and
•
the remainder for working capital and general corporate
    purposes, including commercialization activities for our eSVS
    MESH in select European and other international markets and for
    the purchase of capital equipment and expansion of facilities.
The amounts we actually expend in these areas may vary
    significantly from our expectations and will depend on a number
    of factors, including operating costs and capital expenditures.
    Accordingly, management will retain broad discretion in the
    allocation of the net proceeds of this offering. You will not
    have the opportunity to evaluate the economic, financial or
    other information on which we base our decisions on how to use
    the proceeds. A portion of the net proceeds may also be used to
    acquire or invest in complementary businesses, technologies,
    services or products. We have no current plans, agreements or
    commitments with respect to any such acquisition or investment,
    and we are not currently engaged in any negotiations with
    respect to any such transaction.
Dividend
    Policy
We have never declared or paid cash dividends on our capital
    stock. Following the completion of this offering, we intend to
    retain our future earnings, if any, to finance the further
    development and expansion of our business and do not expect to
    pay cash dividends in the foreseeable future. Payment of future
    cash dividends, if any, will be at the discretion of our board
    of directors after taking into account various factors,
    including our financial condition, operating results, current
    and anticipated cash needs, outstanding indebtedness and plans
    for expansion and restrictions imposed by lenders, if any.
22
Table of Contents
Capitalization
The following table sets forth our capitalization as of
    December 31, 2009 on:
•
an actual basis; and
•
an as adjusted basis to reflect the receipt of the net proceeds
    from the sale
    of           shares
    of common stock in this offering at an assumed initial public
    offering price of $      per share, the
    midpoint of the range on the front cover of this prospectus,
    after deducting the estimated underwriting discounts and
    commissions and estimated offering expenses payable by us.
You should read this capitalization table together with our
    financial statements and the related notes appearing elsewhere
    in this prospectus, as well as "Management's
    Discussion and Analysis of Financial Condition and Results of
    Operations" and other financial information included in
    this prospectus.
As of December 31,
2009
Actual
As Adjusted(1)
Stockholders' equity:
Common stock, $0.01 par value, 40,000,000 common shares and
    10,000,000 undesignated shares authorized, 12,398,919 common
    shares issued and outstanding,
    actual;          shares
    authorized,          issued
    and outstanding, as adjusted
$
124
$
Additional paid-in capital
11,556
Accumulated other comprehensive gain
33
Deficit accumulated during development stage
(9,201
)
Total stockholders' equity
2,512
Total capitalization
$
2,512
$
(In thousands, except share and per
    share data)
(1)
A $1.00 increase or decrease in the assumed initial public
    offering price would result in an approximately
    $      million increase or
    decrease in as adjusted additional paid-in capital, as adjusted
    total stockholders' equity and as adjusted total
    capitalization, assuming the number of shares offered by us, as
    set forth on the front cover of this prospectus, remains the
    same and after deducting the estimated underwriting discounts
    and commissions and estimated offering expenses payable by us.
The outstanding share information in the table above is based on
    the number of shares outstanding as of December 31, 2009,
    and excludes:
•
598,000 shares of common stock issuable upon the exercise
    of outstanding stock options as of December 31, 2009 at a
    weighted average exercise price of $3.08 per share; and
•
1,401,000 additional shares of common stock reserved and
    available for future issuances under our 2007 Long-Term
    Incentive Plan.
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Dilution
If you invest in our common stock, your ownership interest will
    be diluted to the extent of the difference between the initial
    public offering price per share of our common stock and the as
    adjusted net tangible book value per share of our common stock
    immediately after completion of this offering.
As of December 31, 2009, we had a net tangible book value
    of $2.5 million, or $0.20 per share of common stock. Net
    tangible book value per share is equal to our total tangible
    assets (total assets less intangible assets) less our total
    liabilities divided by the number of shares of common stock
    outstanding.
After giving effect to our sale of shares of common stock at an
    assumed initial public offering price of
    $      per share, the midpoint of the
    range on the front cover of this prospectus, deducting the
    estimated underwriting discounts and commissions and offering
    expenses, the as adjusted net tangible book value of our common
    stock, as of December 31, 2009, would have been
    $      million, or
    $      per share. This amount
    represents an immediate increase in net tangible book value to
    our existing stockholders of $      per
    share and an immediate dilution to new investors of
    $      per share.
The following table illustrates this dilution on a per share
    basis:
Assumed initial public offering price per share
$
Historical net tangible book value per share as of
    December 31, 2009
$
0.20
Increase in net tangible book value per share attributable to
    new investors purchasing shares in this offering
As adjusted net tangible book value per share after this offering
Dilution per share to new investors in this offering
$
A $1.00 increase or decrease in the assumed initial public
    offering price of $      per share
    would increase or decrease, respectively, our as adjusted net
    tangible book value by
    $      million, the as adjusted
    net tangible book value per share by
    $      per share and the dilution in
    the net tangible book value to investors in this offering by
    $      per share, assuming the number
    of shares offered by us, as set forth on the cover page of this
    prospectus, remains the same and after deducting the estimated
    underwriting discounts and commissions and estimated offering
    expenses payable by us.
The following table summarizes, as of December 31, 2009, on
    an as adjusted basis, the number of shares of common stock
    purchased from us, the total consideration paid to us and the
    average price per share paid by our existing stockholders and by
    new investors, based upon an assumed initial public offering
    price of $      per share, the midpoint
    of the range on the front cover of this prospectus, and before
    deducting estimated underwriting discounts and commissions and
    offering expenses payable by us.
Weighted
Shares Purchased
Total Consideration
Average Price
Number
Percent
Amount
Percent
per Share
Existing stockholders
%
$
%
$
New investors
Total
100
%
$
100
%
A $1.00 increase or decrease in the assumed initial public
    offering price of $      per share
    would increase or decrease, respectively, total consideration
    paid by new investors and total consideration paid by all
    stockholders by approximately
    $      million, assuming that the
    number of shares offered by us, as set forth on the front cover
    of this prospectus, remains the same.
In the preceding tables, the shares of common stock outstanding
    exclude, as of December 31, 2009:
•
598,000 shares of common stock issuable upon exercise of
    stock options outstanding as of December 31, 2009 at a
    weighted average exercise price of $3.08 per share;
24
Table of Contents
•
1,401,000 additional shares of common stock reserved and
    available for future issuances under our 2007 Long-Term
    Incentive Plan; and
•
shares of our common stock that may be purchased by the
    underwriters to cover over-allotments, if any.
If the underwriters exercise their option to purchase additional
    shares in full:
•
the number of shares of our common stock held by existing
    stockholders would decrease to     % of
    the total number of shares of our common stock outstanding after
    this offering;
•
the number of shares of our common stock held by new investors
    would increase to     % of the total
    number of shares of our common stock outstanding after this
    offering; and
•
our as adjusted net tangible book value at December 31,
    2009 would have been
    $      million, or
    $      per share of common stock,
    representing an immediate increase in as adjusted net tangible
    book value of $      per share of
    common stock to our existing stockholders and an immediate
    dilution of $      per share to
    investors purchasing shares in this offering.
Because we expect the exercise prices of the outstanding options
    to be significantly below the assumed initial public offering
    price of $      per share, the midpoint
    of the range on the front cover of this prospectus, investors
    purchasing common stock in this offering will suffer additional
    dilution when and if these options are exercised. If the options
    exercisable for 598,000 shares of common stock were
    exercised prior to this offering, but assuming no exercise of
    the underwriters' option to purchase additional shares, our
    existing stockholders would, after this offering,
    own     % of the total number of
    outstanding shares of our common stock while
    contributing     % of the total
    consideration for all shares, and our new investors would
    own     % of the total number of
    outstanding shares of our common stock while
    contributing     % of the total
    consideration for all shares.
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Table of Contents
Selected
    Financial Data
The following table summarizes our selected financial data for
    the periods and as of the dates indicated. The selected
    financial data should be read in conjunction with, and are
    qualified by reference to, our financial statements and related
    notes and "Management's Discussion and Analysis of
    Financial Condition and Results of Operations" appearing
    elsewhere in this prospectus. The statements of operations data
    for the period from May 1, 2007 (inception) through
    December 31, 2007, the years ended December 31, 2008
    and 2009, and the period from May 1, 2007 (inception)
    through December 31, 2009, and the balance sheet data at
    December 31, 2008 and 2009, are derived from the audited
    financial statements included elsewhere in this prospectus. The
    balance sheet data at December 31, 2007 is derived from
    audited financial statements not included in this prospectus.
    The historical results are not necessarily indicative of results
    to be expected in any future period.
Period from
Period from
May 1, 2007 (Date of
May 1, 2007 (Date
Inception) to
of Inception) to
December 31,
Year Ended December 31,
December 31,
2007
2008
2009
2009
Statements of Operations Data:
Operating expenses:
Research and development
$
196
$
2,635
$
3,004
$
5,835
Selling, general and administrative
381
754
779
1,914
Operating loss
(577
)
(3,389
)
(3,783
)
(7,749
)
Interest income
65
52
17
134
Interest expense
(164
)
(390
)
(181
)
(735
)
Impairment of available for sale securities
—
(85
)
—
(85
)
Change in fair value of investor stock purchase option
—
—
610
610
Net loss attributable to common stockholders
$
(676
)
$
(3,812
)
$
(3,337
)
$
(7,825
)
Basic and diluted net loss per share
$
(0.16
)
$
(0.62
)
$
(0.30
)
Weighted average common shares outstanding—basic and diluted
4,106,557
6,100,767
11,069,342
(In thousands, except share and per
    share amounts)
As of December 31,
2007
2008
2009
Balance Sheet Data:
Cash, cash equivalents, and short-term investments
$
2,370
$
1,124
$
3,417
Working capital
2,262
607
2,226
Total assets
2,637
1,452
3,740
Long-term debt, net
2,770
2,862
—
Total stockholders' equity (deficit)
$
(305
)
$
(2,016
)
$
2,512
(In thousands)
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Table of Contents
Management's
    Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion of our financial condition and
    results of operations should be read in conjunction with the
    "Selected Financial Data" and our financial statements
    and the related notes included elsewhere in this prospectus.
    This discussion contains forward-looking statements, which are
    based on our assumptions about the future of our business. Our
    actual results will likely differ materially from those
    contained in the forward-looking statements. Please read
    "Special Note Regarding Forward-Looking Statements"
    included elsewhere in this prospectus for additional information
    regarding forward-looking statements used in this prospectus.
Overview
We are a medical device company focused on developing,
    manufacturing and commercializing our innovative external
    saphenous vein support technology, or eSVS MESH, for use in
    coronary artery bypass grafting, or CABG, surgery. Our eSVS MESH
    is a nitinol mesh sleeve that, when placed over a saphenous vein
    graft during CABG surgery, is designed to improve the structural
    characteristics and long-term performance of the vein graft.
    CABG surgery is one of the most commonly performed surgeries in
    the United States, with the American Heart Association
    estimating that 448,000 CABG procedures were performed in the
    United States in 2006. In addition, the Millennium Research
    Group estimates that there will be 165,000 CABG procedures per
    year in Europe by 2013. In CABG procedures, surgeons harvest
    blood vessels, including the internal mammary artery from the
    chest and the saphenous vein from the leg, and attach the
    harvested vessels to bypass, or provide blood flow around,
    blocked coronary arteries. We believe the use of our eSVS MESH
    with saphenous vein grafts in CABG surgery will improve the
    long-term outcome of CABG procedures, including improved
    openness, or patency, and improved blood flow characteristics
    through the saphenous vein graft, resulting in a reduced need
    for costly and potentially complicated reoperations or
    revascularization procedures.
We have completed enrollment in a 90 patient multi-center
    clinical trial conducted outside the United States. The primary
    effectiveness endpoint of this trial is statistical
    non-inferiority of the patency of eSVS MESH vessels as compared
    to control vessels at nine-months post-implant. Effectiveness
    data, which is based on angiographic patency, is being collected
    at this time. Preliminary safety data has indicated that our
    eSVS MESH and implant procedure do not result in an increase in
    patient complications during or after surgery. We completed
    enrollment in this trial in July 2009, and as of March 1,
    2010, all 90 patients have been implanted for six months or
    more, 83 patients have been implanted for nine months or
    more, and 50 patients have been implanted for
    12 months or more. This trial formed the basis for our CE
    Mark application submitted in February 2010.
We expect to receive CE Mark approval and to begin marketing our
    eSVS MESH in select European Union markets in the second half of
    2010. The U.S. Food and Drug Administration, or FDA, is
    reviewing our application for an investigational device
    exemption, or IDE, which, if granted, will allow us to begin
    clinical trials of our eSVS MESH in the United States. We are
    currently amending our IDE application and anticipate obtaining
    IDE approval in the first half of 2010, and if approved, we
    expect to commence enrollment in our IDE trial in the second
    half of 2010. We anticipate beginning enrollment in a United
    States IDE trial in the second half of 2010. We could be delayed
    by adverse clinical results or regulatory complications, and we
    may never receive marketing approval.
We were incorporated and commenced operations in May 2007. Since
    our inception, we have generated losses. From inception to
    December 31, 2009, we had an accumulated deficit of
    $9.2 million. We have not generated any revenue from
    operations to date and we will not generate any revenue from
    operations until we receive our CE Mark and begin selling our
    eSVS MESH in select European Union markets. We expect to incur
    losses for the foreseeable future as we pursue the development
    and commercialization of our eSVS MESH. Our activities since
    inception have consisted principally of acquiring product and
    technology rights, raising capital, performing research and
    development and conducting preclinical and clinical trials.
    Accordingly, we are considered to be a development stage company
    as of December 31, 2009. Successful completion of our
    development programs and, ultimately, the attainment of
    profitable operations are dependent on future events, including,
    among other things, our ability to obtain regulatory approval
    and achieve commercial adoption of our eSVS MESH.
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Table of Contents
Key Components of
    Our Results of Operations
Research and
    Development Expenses
Since our inception, we have focused our activities on the
    development of our eSVS MESH. We expense both internal and
    external research and development costs as incurred. Research
    and development costs include the costs to design, develop,
    test, seek approval for, and enhance our eSVS MESH and
    production processes. Expenses related to research and
    development consist primarily of personnel costs, including
    salaries, benefits and stock-based compensation; product
    development; preclinical and clinical trials; professional
    service fees; materials and supplies; and facilities-related
    costs. We expense amounts paid to obtain patents or acquire
    licenses, as the ultimate recoverability of the amounts paid is
    uncertain.
While our research and development expenses to date have been
    focused on product development and evaluating the feasibility of
    our eSVS MESH, we expect that a large percentage of our research
    and development expenses in the future will be incurred in
    support of our current and future clinical trials. These
    expenditures are subject to numerous uncertainties in timing and
    costs to complete. As we obtain results from clinical trials, we
    may elect to discontinue or delay clinical trials for certain
    product applications or programs in order to focus our resources
    on more promising product applications. Completion of clinical
    trials may take several years or more, but the length of time
    generally varies according to the type, complexity, novelty and
    intended use of a product. The cost of clinical trials may vary
    significantly over the life of the trial as a result of
    differences arising during the clinical trial, including:
•
the number of sites included in the clinical trials;
•
the length of time required to enroll suitable patient subjects;
•
the number of patients that participate in the clinical
    trials; and
•
the duration of patient
follow-up.
Our expenses related to clinical trials are based on estimates
    of the services received and efforts expended pursuant to
    contracts with multiple clinical trial sites and contract
    research organizations, or CROs, that administer clinical trials
    on our behalf. The financial terms of these agreements are
    subject to negotiation and vary from contract to contract and
    may result in uneven payment flows. Generally, these agreements
    set forth the scope of work to be performed at a fixed fee or
    unit price. Payments under the contracts depend on factors such
    as the successful enrollment of patients and the completion of
    clinical trial milestones. Expenses related to clinical trials
    generally are accrued based on contracted amounts and the
    achievement of milestones, such as number of patients enrolled.
    If timelines or contracts are modified based upon changes to the
    clinical trial design or scope of work to be performed, we
    modify our estimates of accrued expenses accordingly.
We anticipate the cost of completing our U.S. clinical
    trial will be approximately $15.0 million, based upon our
    current expectation for the trial design. Because of the
    numerous risks and uncertainties associated with developing
    medical devices, we are unable to determine the duration and
    completion costs of our development projects or when and to what
    extent sales of our eSVS MESH will commence and become
    significant.
Selling,
    General and Administrative Expenses
Our selling, general and administrative expenses consist
    primarily of salaries and benefits and other costs, including
    stock-based compensation, for our executive and administrative
    personnel; legal and other professional fees; business
    development; insurance and other corporate costs. After
    completion of this offering, we anticipate incurring a
    significant increase in general and administrative expenses as
    we operate as a public company. These increases will likely
    include increased costs for insurance, costs related to the
    hiring of additional personnel and payments to outside
    consultants, lawyers and accountants. We also expect to incur
    significant costs to comply with the corporate governance,
    internal controls and similar requirements applicable to public
    companies. While our selling, general and administrative
    expenses to date have been primarily comprised of general and
    administrative costs, we expect that we will incur significant
    additional sales and marketing expenses as we prepare for and
    commence commercialization of our eSVS MESH.
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Table of Contents
Interest
    Income
Interest income consists of interest earned on investments in
    certificates of deposits and money market accounts.
Interest
    Expense
Interest expense results from interest associated with secured
    convertible notes in the aggregate principal amount of
    $3.0 million, or the Notes. Our reported interest expense
    includes interest payable in cash based upon the stated rate in
    the Notes and the amortization of discount recorded on the Notes
    created by the allocation of a portion of the Note proceeds to
    the fair value of the stock purchase options granted in
    conjunction with the issuance of the Notes and due to the
    beneficial conversion feature specified in the Notes. Beneficial
    conversion feature accounting rules require the recognition of
    the intrinsic value of the conversion feature at the time of the
    Notes' issuance, which is then amortized as additional
    interest expense over the life of the Notes.
Critical
    Accounting Policies and Estimates
Our management's discussion and analysis of financial
    condition and results of operations is based on our financial
    statements, which have been prepared in accordance with
    accounting principles generally accepted in the United States,
    or GAAP. The preparation of these financial statements requires
    us to make estimates and judgments that affect the reported
    amounts of assets, liabilities and expenses. On an ongoing
    basis, we evaluate these estimates and judgments, including
    those described below. We base our estimates on our historical
    experience and on various other assumptions that we believe to
    be reasonable under the circumstances. These estimates and
    assumptions form the basis for making judgments about the
    carrying values of assets and liabilities that are not readily
    apparent from other sources. Actual results and experiences may
    differ materially from these estimates.
While our significant accounting policies are more fully
    described in Note 2 to our financial statements included at
    the end of this prospectus, we believe that the following
    accounting policies are the most critical to aid you in fully
    understanding and evaluating our reported financial results and
    affect the more significant judgments and estimates that we use
    in the preparation of our financial statements.
Research and
    Development Expenses
We expense research and development costs, including clinical
    trial costs, when incurred, consistent with the guidance of FASB
    ASC 730,
Research and Development
. All of our clinical
    trials are performed at clinical trial sites and are
    administered by CROs. We accrue costs for clinical trials
    performed by CROs based on estimates of work performed under the
    contracts. Costs of setting up clinical trial sites are accrued
    immediately. Expenses related to clinical trials generally are
    accrued based on contracted amounts and the achievement of
    milestones, such as number of patients enrolled.
All material clinical trial and CRO contracts are terminable by
    us upon written notice and we are generally only liable for
    actual effort expended by the CROs and certain non-cancelable
    expenses incurred at any point of termination.
Stock-Based
    Compensation
Stock-based incentive awards are accounted for under the
    provisions of FASB ASC 718,
Compensation—Stock
    Compensation
, which requires companies to measure and
    recognize the cost of employee and non-employee services
    received in exchange for awards of equity instruments based on
    the grant date fair value of those awards. Compensation cost is
    recognized ratably using the straight-line attribution method
    over the expected vesting period, which is considered to be the
    requisite service period. In addition, we are required to
    estimate the amount of expected forfeitures when calculating the
    compensation costs, instead of accounting for forfeitures as
    incurred. All of our options previously awarded were classified
    as equity instruments and continue to maintain their equity
    classification.
The fair value of options is estimated at the date of grant
    using the Black-Scholes option pricing model with the
    assumptions described in the following sentences. Risk free
    interest rates are based upon U.S. Treasury rates
    appropriate for the expected term. Expected volatility and
    forfeiture rates are based on the volatility rates of a set
29
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of guideline companies, which consist of public and recently
    public medical technology companies. The assumed dividend yield
    is zero, as we do not expect to declare any dividends in the
    foreseeable future. The expected term is determined using the
    simplified method allowed by SEC Staff Accounting
    Bulletin No. 110. The fair market value of the common
    stock underlying the stock options has been determined by our
    board of directors at each award grant date based upon a variety
    of factors, as discussed below. If we had made different
    assumptions and estimates, the amount of our recognized and to
    be recognized stock-based compensation expense could have been
    materially different. We believe that we have used reasonable
    methodologies, approaches and assumptions in determining the
    fair market value of our common stock.
Significant
    Factors, Assumptions and Methodologies Used in Determining Fair
    Market Value of Common Stock
The following table summarizes by ranges of grant date, the
    number of shares subject to options granted in 2007, 2008 and
    2009 and the associated per share exercise price, estimated fair
    market value and ASC Topic 718 Black-Scholes Value. The exercise
    prices were set by our board of directors at prices believed to
    equal the fair market value of our common stock at each of the
    grant dates, taking into account all information available at
    those times. We did not obtain any third party contemporaneous
    valuations.
ASC Topic 718 Black-
Date Range of Option Grants
Number of Shares
Exercise Price
Fair Market Value
Scholes Value
September 2007 through February 2008
349,000
$
1.00
$
1.00
$
0.52 - $0.55
March 2008
10,000
2.00
2.00
1.07
June 2008 through January 2009
219,000
5.83
5.83
2.81 - 3.20
September 2009
40,000
6.00
6.00
2.99
A brief narrative of the factors considered in estimating the
    fair market value of our common stock as of the date of each
    grant and the option exercise price is set forth below. The
    factors generally included, but were not limited to, the most
    recent purchase prices of our common stock issued to third
    parties in arms-length transactions, the lack of marketability
    of our common stock, the progress of our product development,
    the progress of our preclinical and clinical testing, and the
    risks associated with the completion of our business plan.
September
    2007 through February 2008
The estimated fair market value of our common stock as
    determined by our board of directors was $1.00 from September
    2007 through February 2008. The estimated fair value of $1.00
    primarily reflects the issuance of the Notes in July 2007, which
    were convertible into common stock at $0.625 per share, and
    continued progress towards the product development of our eSVS
    MESH, including the first successful manufacturing of our eSVS
    MESH and the commencement of negotiations for our Assignment and
    License Agreement with Medtronic.
March
    2008
The estimated fair market value of our common stock as
    determined by our board of directors was $2.00 per share in
    March 2008. The increase in the estimated fair market value
    primarily reflects continued progress toward the product
    development of our eSVS MESH, including the first successful
    implants of our eSVS MESH in a preclinical trial in February
    2008.
June 2008
    through January 2009
The estimated fair market value of our common stock as
    determined by our board of directors was $5.83 per share from
    June 2008 through January 2009. The increase in the estimated
    fair market value reflects the exercise in May 2008 of a stock
    purchase option by a third party, pursuant to which we issued
    600,000 shares of common stock at a purchase price of $5.83
    per share. We issued this stock purchase option in July 2007,
    and it became exercisable by its terms following our
    determination that our eSVS MESH was suitable for human
    implantation. Please see
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Table of Contents
"Certain Relationships and Related Party
    Transactions—Investment Agreement with Kips Bay
    Investments, LLC" for a description of the stock purchase
    option.
September
    2009
The estimated fair market value of our common stock as
    determined by our board of directors was $6.00 per share in
    September 2009. The increase in estimated fair market value
    reflects the sale of 516,241 shares of common stock to
    third party investors in August 2009 at $6.00 per share.
Results
    of Operations
Comparison of
    the Year Ended December 31, 2008 with the Year Ended
    December 31, 2009
Year Ended December 31,
Percent
2008
2009
Change
Operating expenses:
Research and development
$
2,635
$
3,004
14.0
%
Selling, general and administrative
754
779
3.3
Total operating expenses
3,389
3,783
11.6
Other income (expense):
Interest income
52
17
(67.3
)
Interest expense
(390
)
(181
)
(53.6
)
Impairment of available for sale securities
(85
)
—
Gain from change in market value of investor option agreement
—
610
Net loss
$
(3,812
)
$
(3,337
)
(12.5
)%
(In thousands)
Research and development and selling, general and administrative
    expenses include non-cash compensation expense as a result of
    our issuance of stock options. We expense the fair value of
    stock options over their vesting periods. The terms and vesting
    schedules for share-based awards vary by type of grant and the
    employment status of the grantee. The awards granted through
    December 31, 2009 vest upon time-based conditions. We
    expect to record additional non-cash compensation expense in the
    future, which may be significant. The following table summarizes
    the stock-based compensation expense in our statement of
    operations for 2008 and 2009:
December 31,
2008
2009
Research and development
$
298
$
390
Selling, general and administrative
40
47
Total stock-based compensation
$
338
$
437
(In thousands)
Research
    and Development
Our research and development expenses increased 14.0% from
    $2.6 million in 2008 to $3.0 million in 2009. This
    increase was caused primarily by an increase of approximately
    $350,000 from 2008 to 2009 in the expenses associated with our
    international feasibility trial for our eSVS MESH, which began
    enrolling patients in August 2008. These expenses include per
    patient and per procedure fees payable to the clinical trial
    sites, clinical trial administration costs payable to a CRO, and
    costs related to the
set-up
of
    clinical trial sites and training of medical staff.
Selling,
    General and Administrative
Selling, general and administrative expenses increased 3.3% from
    $754,000 in 2008 to $779,000 in 2009. This
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increase was the result of an increase in salary expense related
    to the temporary addition of an individual performing marketing
    related work, partially offset by reduced travel expenses and
    professional fees.
Interest
    Income
Interest income declined from $52,000 in 2008 to $17,000 in
    2009. This decline resulted primarily from decline in short-term
    interest rates from 2008 to 2009.
Interest
    Expense
Interest expense declined from $390,000 in 2008 to $181,000 in
    2009. The Notes were converted into shares of common stock in
    February 2009, resulting in only two months of interest expense
    in 2009, as compared with a full year of interest in 2008. This
    decline was offset by the write-off of the $138,000 balance in
    unamortized discount on the Notes at the time of the conversion.
Comparison of
    the Period from May 1, 2007 (Date of Inception) to
    December 31, 2007 with the Year Ended December 31,
    2008
Period from
May 1, 2007 (Date of
Inception) to
Year Ended
December 31,
December 31,
Percent
2007
2008
Change
Operating expenses:
Research and development
$
196
$
2,635
1,244.4
%
Selling, general and administrative
381
754
97.9
Total operating expenses
577
3,389
487.3
Other income (expense):
Interest income
65
52
(20.0
)
Interest expense
(164
)
(390
)
137.8
Impairment of available for sale securities
—
(85
)
—
Net loss
$
(676
)
$
(3,812
)
463.9
%
(In thousands)
The following table summarizes the stock-based compensation
    expense in our statement of operations for 2007 and 2008:
December 31,
2007
2008
Research and development
$
14
$
298
Selling, general and administrative
2
40
Total stock-based compensation
$
16
$
338
(In thousands)
Research
    and Development
Our research and development expenses increased from $196,000 in
    2007 to $2.6 million in 2008. Research and development
    expenses in 2007 were primarily comprised of personnel expenses
    of $150,000. In 2008, we operated for a full year and also
    expanded our research and development staff, which resulted in
    our personnel expenses, including stock-based compensation,
    increasing by approximately $1.2 million. The balance of
    the increase related to expenses for the development of our eSVS
    MESH and the initiation of our international clinical trial.
    These expenses included product development, preclinical trials,
    clinical trial site selection, training and operation of our
    international clinical trial and intellectual property related
    costs.
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Table of Contents
Selling,
    General and Administrative
Selling, general and administrative expenses increased 97.9%
    from $381,000 in 2007 to $754,000 in 2009. This increase was
    primarily a function of having 12 months of operations in
    2008, compared with seven months in 2007. In addition, we
    incurred approximately $80,000 in fees for an outside consultant
    working on certain marketing matters.
Interest
    Income
Interest income declined 20.0% from $65,000 in 2007 to $52,000
    in 2008. This decline resulted from a decline in available cash
    and equivalents and short-term investments, which more than
    offset our having a full 12 months during which interest
    was earned in 2008.
Interest
    Expense
Interest expense increased 137.8% from $164,000 in 2008 to
    $390,000 in 2009. This increase resulted from the Notes being
    outstanding for the entire year in 2008, as compared with
    slightly more than five months in 2007.
Impairment of
    Available for Sale Investments
In conjunction with a simplified employee retirement plan that
    we maintain for the benefit of our employees, we invested
    $250,000 in a mutual fund under an arrangement that resulted in
    reduced maintenance and transaction costs for our employees. Due
    primarily to the significant decline in the U.S. stock
    market and the accompanying declines in the U.S. economy
    during 2008, we concluded as of December 31, 2008 that the
    value of this mutual fund investment was impaired and that this
    decline in value was other than temporary. We recorded a charge
    of $85,000, which resulted in a new adjusted cost basis for this
    investment. We had no other realized gains or losses in 2007 or
    2008.
Income
    Taxes
Since inception, we have incurred operating losses and,
    accordingly, have not recorded a provision for income taxes for
    any of the periods presented. As of December 31, 2009, we
    had net operating loss carryforwards for federal and state
    income tax purposes of approximately $6.5 million. We also
    had federal research and development tax credit carryforwards of
    approximately $400,000. If not utilized, the federal net
    operating loss and tax credit carryforwards will expire
    beginning in 2027. Utilization of net operating loss and credit
    carryforwards may be subject to a substantial annual limitation
    due to limitations provided by the Internal Revenue Code of
    1986, as amended, that are applicable if we experience an
    "ownership change" that may occur, for example, as a
    result of this offering aggregated with certain other sales of
    our stock before or after this offering. If not utilized, the
    state net operating loss carryforward will expire beginning in
    2022. The annual limitation may result in the expiration of our
    net operating loss and tax credit carryforwards before they can
    be used.
Liquidity and
    Capital Resources
The following table summarizes our liquidity and capital
    resources as of and for each of the last two fiscal years, and
    is intended to supplement the more detailed discussion that
    follows:
December 31,
Liquidity and Capital Resources
2008
2009
Cash and cash equivalents
$
943
$
2,469
Short-term investments
181
948
Working capital
607
2,226
(In thousands)
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Period from
Period from
May 1, 2007
May 1, 2007
(Date of
(Date of
Inception)
Year Ended
Inception)
to December 31,
December 31,
to December 31,
Cash Flow Data
2007
2008
2009
2009
Cash provided by (used in):
Operating activities
$
(505
)
$
(2,838
)
$
(3,382
)
$
(6,725
)
Investment activities
(760
)
196
(840
)
(1,404
)
Financing activities
3,100
1,750
5,748
10,598
Net increase (decrease) in cash and cash equivalents
$
1,835
$
(892
)
$
1,526
$
2,469
(In thousands)
Cash and Cash
    Equivalents
Our total cash resources, excluding short-term investments, as
    of December 31, 2009 were $2.5 million, compared to
    $943,000 as of December 31, 2008. As of December 31,
    2009, we had approximately $1.2 million in current
    liabilities and $2.2 million in net working capital. We
    incurred a net loss of $3.3 million and had negative cash
    flow from operating activities of $3.4 million for the year
    ended December 31, 2009. Since May 1, 2007 (date of
    inception) through December 31, 2009, we had an accumulated
    deficit of $9.2 million, while negative cash flow from
    operating activities has amounted to $6.7 million. The
    difference between our accumulated deficit and negative cash
    flow from operations results primarily from the adoption of FASB
    ASC
815-40
on January 1, 2009. Under the provisions of FASB ASC
815-40,
certain instruments previously reported as equity are now
    accounted for as derivative instruments. These provisions were
    initially applied by recording a non-cash, cumulative effect
    adjustment of $1.4 million to retained earnings. Our
    accumulated deficit also includes non-cash charges for stock
    based compensation and depreciation of $791,000 and $118,000,
    respectively, and approximately $217,000 of accrued interest
    expense which was settled through conversion into our common
    stock.
As we continue to pursue regulatory approvals, prepare for
    commercialization in international markets, develop our
    manufacturing capabilities and develop additional applications
    for our eSVS MESH, we expect to continue to incur substantial
    and increasing losses, which will continue to generate negative
    net cash flows from operating activities.
To date, we have funded our operations primarily through private
    sales of common stock and convertible debt. As of
    December 31, 2009, we had received net proceeds of
    approximately $7.6 million from the sale of equity
    securities, and net proceeds of approximately $3.0 million
    from the issuance of the Notes, all of which have been converted
    into common stock. We have not generated any revenue from
    operations to date and we will not generate any revenue from
    operations until we receive approval from the FDA, or an
    equivalent foreign regulatory body, to begin selling our eSVS
    MESH. We intend to use the net proceeds of this offering to seek
    regulatory approval to market our technology in the United
    States and abroad, including human clinical trials in the United
    States; to develop and test additional applications of our eSVS
    MESH; to make certain milestone payments for our acquired
    intellectual property; and for working capital and general
    corporate purposes. We may seek to raise additional funds
    through various sources, such as equity and debt financings, or
    through strategic collaborations and license agreements. We can
    give no assurances that we will be able to secure such
    additional sources of funds to support our operations, or if
    such funds are available to us, that such additional financing
    will be sufficient to meet our needs.
Net Cash Used
    in Operating Activities
Net cash used in operating activities was $505,000 in 2007,
    $2.8 million in 2008, and $3.4 million in 2009. From
    May 1, 2007 (date of inception) to December 31, 2009,
    net cash used in operating activities was $6.7 million. The
    net cash used in each of these periods primarily reflects the
    net loss for those periods, offset in part by depreciation,
    non-cash stock-based compensation and the effects of changes in
    operating assets and liabilities.
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Table of Contents
Net Cash
    Provided by (Used in) Investment Activities
Net cash provided by (used in) investment activities was
    $(760,000) in 2007, $196,000 in 2008, and $(840,000) in 2009.
    From May 1, 2007 (date of inception) to December 31,
    2009, net cash used in investment activities was
    $1.4 million. Cash used in investment activities is related
    to purchases and sales of short-term investments and purchases
    of property and equipment.
Net Cash
    Provided by Financing Activities
Net cash provided by financing activities was $3.1 million
    in 2007, $1.8 million in 2008, $5.7 million in 2009.
    From May 1, 2007 (date of inception) to December 31,
    2009, net cash provided by financing activities was
    $10.6 million. Net cash provided by financing activities
    was primarily attributable to proceeds from issuances of the
    Notes and from private sales of our common stock.
Capital
    Requirements
We expect to incur substantial expenses and generate significant
    operating losses as we continue to execute our business strategy
    including:
•
collecting effectiveness data from our 90 patient,
    multi-center clinical trial conducted outside the United States
    and seeking an IDE approval from the FDA to begin clinical
    trials in the United States;
•
obtaining CE Mark approval;
•
commercializing our eSVS MESH in select European markets;
•
obtaining regulatory approval and commercializing our eSVS MESH
    in the United States;
•
conducting clinical trials to expand indications for our eSVS
    MESH;
•
hiring additional personnel for managerial, research and
    development, operations and other functions;
•
expanding our facilities to increase our manufacturing and
    development capabilities; and
•
implementing new operational, financial and management systems
    to comply with SEC requirements.
Our future capital uses and requirements depend on numerous
    forward-looking factors. These factors include the following:
•
the timing of our receipt of approval to sell in select European
    markets, if received at all;
•
our ability to demonstrate safety and effectiveness of our eSVS
    MESH;
•
the selling price of our eSVS MESH to distributors and the price
    that distributors charge hospitals;
•
the rate of progress in establishing reimbursement arrangements
    with third-party payors;
•
the effect of competing technological and market developments;
•
the cost and delays in product development that may result from
    changes in regulatory oversight applicable to our eSVS MESH;
•
the costs involved in filing and prosecuting patent applications
    and enforcing or defending patent claims;
•
the cost of expanding our commercial operations, including our
    selling and marketing efforts;
•
our ability to establish and maintain effective relationships
    with independent distributors;
•
the rate at which physicians adopt our eSVS MESH for use in CABG
    surgery; and
•
the progress of preclinical and clinical trials required to
    support our applications for regulatory approvals, including our
    human clinical trials in the United States.
We have not generated any revenue from operations to date. We do
    not expect to generate revenue unless or until we obtain
    regulatory approval of and commercialize our eSVS MESH. While
    there can be no guarantee, we anticipate commencing sales in
    select international markets by the end of the current fiscal
    year. However, we do not expect to generate meaningful sales in
    the current fiscal year and we expect our operating losses and
    negative
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Table of Contents
cash flows from operations to continue for the foreseeable
    future. Our future capital requirements will depend upon a
    number of factors as indicated above.
We expect the proceeds of this offering, together with our
    existing resources as of the date of this prospectus, to be
    sufficient to fund our planned operations for at least the next
    12 months. However, we may require significant additional
    funds earlier than we currently expect in order to conduct
    additional clinical trials to obtain regulatory approvals of our
    eSVS MESH. To the extent that we raise additional capital
    through the sale of equity or convertible debt securities,
    stockholders' interest will be diluted, and the terms may
    include liquidation or other preferences that adversely affect
    the rights of our stockholders. Debt financing, if available,
    may involve agreements that include covenants limiting or
    restricting our ability to take specific actions such as
    incurring additional debt, making capital expenditures or
    declaring dividends. Any of these events could adversely affect
    our ability to achieve our product development and
    commercialization goals and harm our business.
If adequate funds are not available, we may be required to
    terminate, significantly modify or delay our development
    programs, reduce our planned commercialization efforts, or
    obtain funds through collaborators that may require us to
    relinquish rights to our technologies or product candidates that
    we might otherwise seek to develop or commercialize
    independently. We may elect to raise additional funds even
    before we need them if the conditions for raising capital are
    favorable.
Contractual
    Obligations, Commitments and Contingencies
To date, we have not entered into long-term minimum purchase
    commitments with suppliers. Our principal commitments consist of
    obligations relating to our international clinical trial and
    obligations under the lease for our facility in Minneapolis,
    Minnesota, and certain office equipment.
The following table summarizes our outstanding contractual
    obligations as of December 31, 2009:
Payments Due by Period
Less than
After
Total
1 Year
1-3 Years
4-5 Years
5 Years
International clinical trial obligations(1)
$
241
$
241
$
—
$
—
$
—
Operating lease obligations(2)
52
46
6
—
—
Key supplier purchase commitment(3)
43
43
—
—
—
Total
$
336
$
330
$
6
$
—
$
—
(In thousands)
(1)
The outstanding obligations for our international clinical trial
    include our estimated costs to complete patient monitoring and
follow-up
and trial data collection and analysis for our 90 patient
    multi-center clinical trial conducted outside the United States.
    Patient enrollment in this trial was completed in July 2009.
(2)
Operating lease obligations represent future minimum lease
    payments under non-cancelable operating leases for our facility
    and certain office equipment. The operating lease obligation for
    our corporate facility ends September 30, 2010. We are
    currently in negotiations with our landlord to renew this lease
    and secure additional space adjacent to our current offices. As
    of the date of this prospectus, we have not reached such an
    agreement with our landlord.
(3)
The amount presented reflects the undelivered portion of an
    outstanding purchase order with one of our key suppliers. To
    date we have not entered into any long term supply agreements
    with any of our vendors. As of December 31, 2009, remaining
    outstanding purchase orders were not significant.
Royalty
    Payments
The core intellectual property relating to our eSVS MESH,
    including five patent applications pending in the United States
    and nine patent applications pending in countries outside the
    United States, was acquired from Medtronic, Inc. pursuant to an
    Assignment and License Agreement dated October 9, 2007.
    Pursuant to the Assignment and License Agreement, Medtronic has
    also assigned to us certain patents relating to a brushed ePTFE
36
Table of Contents
vascular graft, or the Brushed Graft Product, and licensed to us
    certain technology to produce platelet-poor plasma for use in
    connection with the Brushed Graft Product.
As consideration for the assignment of intellectual property
    relating to the eSVS MESH and the Brushed Graft Product, we have
    agreed to pay Medtronic an aggregate of $20.0 million upon
    the achievement of certain sales milestones relating to the eSVS
    MESH and the Brushed Graft Product and a royalty of 4% on sales
    of our eSVS MESH and the Brushed Graft Product. The royalty will
    terminate upon the earlier of the expiration of all of the
    patents and patent applications, or when the aggregate royalties
    paid reach $100.0 million.
In the recitals to the Assignment and License Agreement, we
    stated that we would use our reasonable best efforts to develop
    and commercialize both the Brushed Graft Product and the eSVS
    MESH. While we have undertaken activities to develop and
    commercialize the Brushed Graft Product, we are currently
    primarily focused on the development of our eSVS MESH for use in
    CABG surgery and additional applications of our eSVS MESH. Any
    or all licenses granted to us pursuant to our agreement with
    Medtronic may be terminated and potentially all of the core
    intellectual property and patent rights related to our eSVS MESH
    shall revert to Medtronic, upon notice by Medtronic, (i) if
    we become insolvent, make an assignment for the benefit of
    creditors, go into liquidation or receivership or otherwise lose
    legal control of our business; and (ii) if we determine to
    cease commercializing either the Brushed Graft Product or our
    eSVS MESH, then Medtronic may terminate our license to patent
    rights related to the Brushed Graft Product or the patent rights
    related to our eSVS MESH, as applicable. If we cease
    commercialization of the Brushed Graft Product and not the eSVS
    MESH, we believe that Medtronic is entitled to terminate only
    the license to patent rights related to the Brushed Graft
    Product and not the patent rights related to the eSVS MESH.
    Similarly, if we cease commercialization of the eSVS MESH but
    not the Brushed Graft Product, we believe that Medtronic is
    entitled to cause the reversion of the patent rights related to
    the eSVS MESH but not terminate our license to patent rights
    related to the Brushed Graft Product. We recognize, however,
    that the terms of our agreement with Medtronic are susceptible
    to differing interpretations.
Off-Balance Sheet
    Arrangements
Since inception, we have not engaged in any off-balance sheet
    activities as defined in
Regulation S-K
Item 303(a)(4).
Recent Accounting
    Pronouncements
In June 2009, the FASB issued FASB ASC 105,
Generally
    Accepted Accounting Principles
, which establishes the FASB
    Accounting Standards Codification as the sole source of
    authoritative generally accepted accounting principles. Pursuant
    to the provisions of FASB ASC 105, we have updated references to
    GAAP in our financial statements issued for the period ended
    December 31, 2009. The adoption of FASB ASC 105 did not
    impact our financial position or results of operations.
In June 2008, the FASB issued FASB ASC
815-40,
Derivatives and Hedging
, which provides guidance on how
    to determine if certain instruments (or embedded features) are
    considered indexed to a company's own stock, including
    instruments similar to warrants to purchase the company's
    stock. FASB ASC
815-40
clarifies the determination of whether equity-linked instruments
    (or embedded features), such as our convertible notes or options
    to purchase our common stock, are considered indexed to our own
    stock, which would qualify as a scope exception and therefore be
    exempt from the application of FASB ASC 815. FASB ASC
815-40
became effective January 1, 2009. Any outstanding
    instrument at the date of adoption requires a retrospective
    application of the accounting through a cumulative effect
    adjustment to retained earnings upon adoption. Our adoption of
    this guidance had a material impact on our financial position
    and results of operations, as described in Note 6 to our
    financial statements.
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Table of Contents
Business
Overview
We are a medical device company focused on developing,
    manufacturing and commercializing our innovative external
    saphenous vein support technology, or eSVS MESH, for use in
    coronary artery bypass grafting, or CABG, surgery. Our eSVS MESH
    is a nitinol mesh sleeve that, when placed over a saphenous vein
    graft during CABG surgery, is designed to improve the structural
    characteristics and long-term performance of the vein graft.
    CABG is one of the most commonly performed surgeries in the
    United States, with the American Heart Association estimating
    that 448,000 CABG procedures were performed in the United States
    in 2006. In addition, the Millennium Research Group, an
    independent market research firm, estimates that there will be
    165,000 CABG procedures per year in Europe by 2013. In CABG
    procedures, surgeons harvest blood vessels, including the
    internal mammary artery from the chest and the saphenous vein
    from the leg, and attach the harvested vessels to bypass, or
    provide blood flow around, blocked coronary arteries. The
    effectiveness of the procedure, however, is often limited by the
    failure rate of saphenous vein grafts, which has been shown in
    various studies to range from 6% to 30% one year after surgery
    and 60% ten years after surgery. Failure of these grafts,
    typically evidenced by partial or complete blockage and reduced
    or stopped blood flow, can lead to the need for further coronary
    interventions up to and including additional CABG procedures. We
    believe the use of our eSVS MESH with saphenous vein grafts in
    CABG surgery could improve the long-term outcome of CABG
    procedures, including improved openness, or patency, and
    improved blood flow through the saphenous vein graft, resulting
    in a reduced need for costly and potentially complicated
    reoperations or revascularization procedures.
According to the American Heart Association, approximately
    17.6 million people in the United States have coronary
    artery disease, and approximately 587,000 people in the
    United States die each year as a result of the disease. In
    addition, according to a 2007 World Health Organization report,
    approximately 7.2 million people worldwide died of coronary
    heart disease in 2002. The direct and indirect cost of coronary
    artery disease to the U.S. economy is estimated to be over
    $177 billion in 2010. Physicians and patients may select
    among a variety of treatments to address coronary artery
    disease, including pharmaceutical therapy, balloon angioplasty,
    stenting with bare metal or drug-eluting stents, and CABG
    procedures, with the selection often depending upon the stage of
    the disease and the age of the patient. An independent study
    comparing CABG and implantation of drug-eluting stents shows
    that CABG is the more effective long-term treatment for coronary
    artery disease, achieving the best long-term patient outcomes as
    measured by survival rate and need for re-intervention
    12 months after surgery. Moreover, patients with severe and
    multi-vessel coronary artery disease often cannot be effectively
    treated with methods other than CABG. The prevalence of coronary
    artery disease and the success rates for CABG procedures versus
    other treatments for coronary artery disease has made CABG
    surgery one of the most commonly performed surgeries in the
    United States. Based on a report published by the Millennium
    Research Group, moderate growth in coronary artery bypass
    procedures is expected in the United States through 2012 and in
    Europe through 2013, largely due to the increase in procedure
    volumes caused by rising rates of coronary artery disease and
    the need for repeat revascularizations.
According to results published in the European Journal of
    Cardio-Thoracic Surgery in 2006, each CABG procedure involves an
    average of 3.3 bypass grafts, typically consisting of the left
    internal mammary artery, or LIMA, for one graft and the
    saphenous vein for the remaining 2.3 grafts per procedure.
    Saphenous vein grafts fail more frequently than LIMA grafts due
    to differences in structure and size of saphenous vein grafts as
    compared to LIMA grafts. Unlike the LIMA, which is a
    thick-walled artery intended to handle the high pressure blood
    flow from the heart, saphenous veins are thin-walled vessels
    that are intended for a low-pressure venous environment.
    Saphenous veins are also typically larger than the coronary
    arteries to which they are attached and this difference in size
    slows blood flow, adding stress to the vessel wall and
    increasing the risk of thrombosis, or blood clotting. When the
    vein grafts used to bypass a blocked artery are exposed to the
    high pressure of arterial flow, there is significant stress on
    the thin wall of the veins. The vein responds to this injury by
    causing its walls to thicken in a manner that often leads to
    failure of the bypass graft.
Our eSVS MESH is a nitinol mesh sleeve that is placed over the
    saphenous vein graft during CABG surgery and is designed to
    constrict the vein and prevent expansion of the vein graft and
    resulting injury due to increased
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pressure. The constriction of the vein graft also causes the
    diameter of the graft, or lumen, to more closely match the
    diameter of the target coronary artery to which it is attached,
    thereby reducing blood flow disruption. Our eSVS MESH is
    designed to be applied quickly and is compatible with most
    current CABG surgery protocols. In addition, nitinol is commonly
    used in many other implantable medical devices.
We have completed enrollment in a 90 patient multi-center
    clinical trial conducted outside the United States. The primary
    effectiveness endpoint of this trial is statistical
    non-inferiority of the patency of eSVS MESH vessels as compared
    to control vessels at nine-months post-implant. Effectiveness
    data, which is based on angiographic patency, is being collected
    at this time. Preliminary safety data has indicated that our
    eSVS MESH and implant procedure do not result in an increase in
    patient complications during or after surgery. We completed
    enrollment in this trial in July 2009, and as of March 1,
    2010, all 90 patients have been implanted for six months or
    more, 83 patients have been implanted for nine months or
    more, and 50 patients have been implanted for
    12 months or more. This trial formed the basis for our CE
    Mark application submitted in February 2010.
We expect to receive CE Mark approval and to begin marketing our
    eSVS MESH in select European Union markets in the second half of
    2010. The U.S. Food and Drug Administration, or FDA, is
    reviewing our application for an investigational device
    exemption, or IDE, which, if granted, will allow us to begin
    clinical trials of our eSVS MESH in the United States. We
    anticipate beginning enrollment in a United States IDE trial in
    the second half of 2010. We could be delayed by adverse clinical
    results or regulatory complications, and we may never receive
    marketing approval.
We are pursuing additional applications for our eSVS MESH,
    including applications for use in peripheral artery bypass
    surgery, for use with coronary allografts, and for use in
    arteriovenous, or AV, fistula dialysis applications. In
    peripheral artery bypass surgery, saphenous vein grafts are used
    to bypass obstructed arterial vessels in the legs. Coronary
    allografts are saphenous veins obtained from cadavers that are
    used in CABG procedures for patients who do not have appropriate
    arterial or venous conduits. An AV fistula is a surgically
    created connection, or fistula, between an artery and a vein
    used to provide access to the circulatory system of patients
    with kidney disease for chronic dialysis treatment. We believe
    that these applications could have significant commercial
    potential.
Our
    Strategy
Our objective is to achieve significant market adoption of our
    eSVS MESH technology in CABG and other vascular applications.
    Key elements of our strategy to achieve this objective include
    the following:
•
Work with respected medical centers and key thought leaders
    to demonstrate and communicate the potential benefits of our
    eSVS MESH.
We are in the process of collecting effectiveness
    data from our 90 patient, multi-center trial conducted
    outside the United States and are currently seeking an IDE from
    the FDA to begin clinical trials in the United States. We
    believe that it will be important to increase the awareness of
    our eSVS MESH by collaborating with key opinion leaders at
    leading academic and medical institutions and supporting
    post-approval marketing studies and publication of peer-reviewed
    articles. We have formed clinical relationships with key
    surgeons at several leading cardiovascular surgery and CABG
    centers.
•
Commercialize our eSVS MESH in select European markets.
We expect to receive CE Mark approval and to begin marketing our
    eSVS MESH in select European markets in the second half of 2010.
    We plan to engage independent distributors experienced in their
    respective European markets to promote and sell our eSVS MESH.
    Concurrent with this effort, we intend to commence activities to
    seek regulatory approval to begin marketing in other
    international markets.
•
Obtain regulatory approval and commercialize our eSVS MESH in
    the United States.
The FDA is reviewing our application for
    an IDE, and we expect to receive approval to commence our IDE
    trial in the first half of 2010. We are in discussions with 12
    clinical trial sites to participate in our IDE trial, six of
    which have been engaged as of April 1, 2010. We expect to
    commence enrollment in our IDE trial in the second half of 2010.
    Over the longer term, we will assemble data from our United
    States human clinical trial in support of an application for PMA
    approval from the FDA. If we receive the necessary regulatory
    approval, we plan to commercially introduce our eSVS MESH in the
    United States through independent distributors with access to
    key CABG centers and key physicians.
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•
Conduct trials to expand indications for our eSVS MESH.
We plan to begin preclinical trials in 2010 designed to provide
    proof of concept for the use of our eSVS MESH in peripheral
    artery bypass surgery, for use with coronary allografts, and for
    use with AV fistulas in dialysis patients.
Treatment of
    Coronary Artery Disease
According to the American Heart Association, approximately
    17.6 million people in the United States have coronary
    artery disease, and approximately 587,000 people in the
    United States die each year as a result of the disease. In
    addition, according to a 2007 World Health Organization report,
    approximately 7.2 million people worldwide died of coronary
    heart disease in 2002. The direct and indirect cost of coronary
    artery disease to the U.S. economy is estimated to be over
    $177 billion in 2010. Primary treatment options for
    coronary artery disease are pharmaceutical therapy, balloon
    angioplasty, intravascular stents, and CABG surgery. A
    description of each of these options is provided below:
Pharmaceutical
    Therapy
In patients with less severe disease, pharmaceuticals remain the
    primary treatment approach and include drugs such as platelet
    adhesion inhibitors or drugs that reduce the blood cholesterol
    or triglyceride levels. For more serious disease, however,
    pharmacological therapy alone is often inadequate.
Balloon
    Angioplasty
Percutaneous transluminal coronary angioplasty, commonly
    referred to as balloon angioplasty, is a surgical procedure that
    involves the dilation of the obstructed artery with a balloon
    catheter. Angioplasty is generally successful in increasing
    immediate blood flow and, relative to current surgical
    procedures, offers the benefits of shorter periods of
    hospitalization, quicker recovery times, reduced patient
    discomfort and lower cost. However, according to a trial
    published in the journal Circulation in 2006, over 40% of
    vessels treated with balloon angioplasty return to their
    pre-treatment, narrowed size, a process known as restenosis,
    within six months following the procedure.
Intravascular
    Stents
High rates of restenosis following treatment by balloon
    angioplasty led to the introduction of stents, mesh-like
    metallic tubes that are placed within the narrowed portion of
    the coronary vessel to hold the vessel open after the
    angioplasty balloon has been removed. Although clinical outcomes
    for procedures using stents reflect an improvement over balloon
    angioplasty alone, the effectiveness of stents is still limited
    by restenosis, which for bare metal stents occurs in about 20%
    of cases within six months of the procedure.
Drug eluting stents are coated with specially formulated,
    slow-release drugs designed to prevent restenosis. According to
    the FDA in 2008, drug eluting stents were shown in clinical
    trials to reduce the rate of restenosis within one year after
    placement to 10%. Drug eluting stents are widely used, with a
    current market share relative to total stent usage in the range
    of 70%. However, some studies have been presented that associate
    drug eluting stents with late stage thrombosis, or clotting,
    which can be an adverse event.
Despite the advancements and market success of drug-eluting
    stents and angioplasty therapies, these interventional
    procedures may be less effective than surgical procedures in
    addressing diffuse progressive coronary artery disease. In this
    advanced stage of coronary artery disease, intervention is
    required for multiple vessels, many of which are less than two
    millimeters in internal diameter, a diameter currently
    unsuitable for angioplasty and stenting. In addition, stents
    have been shown to be difficult to place in patients with
    coronary lesions in sections with vessel branches and in
    patients with narrowings in the left main coronary artery. In a
    study published in the New England Journal of Medicine in
    January 2008 that compared drug-eluting stents with CABG in
    multivessel coronary disease, death rates and revascularization
    rates were higher in patients receiving drug-eluting stents than
    in patients receiving CABG, even though the cohort of patients
    receiving CABG was older and had more severe coronary disease.
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CABG
    Surgery
Coronary Artery Bypass Grafting involves the construction of an
    alternative path to bypass a narrowed or occluded coronary
    artery and restore blood flow from the aorta to an area past the
    occlusion. This procedure is normally accomplished using
    saphenous veins from the leg and the LIMA from the chest as
    bypass grafts. Most commonly, the LIMA is utilized for bypassing
    the left anterior descending artery of the heart, or LAD, while
    saphenous veins are utilized for bypassing other coronary
    arteries.
For vein grafts, one end of the harvested vessel is then
    generally attached to the aorta for blood inflow, and the
    opposite end is attached to the target coronary vessel. If a
    mammary artery is used as the bypass graft, it must be dissected
    from the chest wall, leaving one end in place on the aorta,
    while the opposite end is attached to the target vessel,
    providing uninterrupted blood flow from the arterial
    circulation. Once in place, these grafts provide sufficient
    blood flow to bypass the narrowed or occluded portion of the
    coronary artery. The following diagram illustrates the use of
    the internal mammary artery graft and saphenous vein graft in
    CABG surgery:
Current
    Disadvantages of Saphenous Vein Grafts
Since its first successful use in the 1960's, the saphenous
    vein graft has been one of the most commonly used conduits in
    CABG surgery. Some of the main advantages of using the saphenous
    vein include its ease of accessibility, its ease of handling,
    and the number of grafts, typically three, that can be
    constructed from a single vein. Despite these advantages and the
    widespread use of saphenous veins in CABG surgery, several
    issues have been identified, such as:
•
Pressure normally exerted on veins is much lower than the
    pressure on arteries. Arterial pressure is normally
80-120
mm Hg
    while central venous pressure is normally about 3-7 mm Hg.
•
Veins do not have the strong muscular wall seen in arteries.
    Therefore, when placed under higher arterial pressures, the
    veins typically dilate, or expand.
•
Veins have large lumens as compared to arteries, resulting in a
    mismatch of lumen diameters when a saphenous vein graft is
    connected to a coronary artery. This size mismatch results in
    slow, sluggish blood flow in the vein graft with more stress
    placed on the wall of the vein due to blood volume.
The higher pressure of arterial blood flow and the size mismatch
    that results when a saphenous vein is used as a graft in CABG
    surgery often cause the vein to expand, damaging the lining of
    the vein. The vein responds to this damage by causing its walls
    to thicken in a manner that often leads to failure of the bypass
    graft. Smooth muscle cells proliferate in the middle layer of
    the vein wall and migrate to the inner surface of the vein in a
    process known as neointimal hyperplasia. The resulting
    accumulation of activated smooth muscle cells secrete
    inflammatory and growth factors leading to a stenotic
build-up
and
    graft failure over time. The failure rates of saphenous vein
    grafts
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in CABG procedures is well documented in the scientific
    literature. A sampling of data from some of the larger benchmark
    studies is provided below:
Saphenous Vein Graft Failure Rates
1 Year
5 Year*
10 Year*
Number of
Failure
Number of
Failure
Number of
Failure
Year
Author
Patients
Rate
Patients
Rate
Patients
Rate
1984
Barner, et al.
248
7
%
112
26
%
—
—
1996
Fitzgibbon, et al.
3993
19
%
1978
25
%
—
—
2004
Goldman, et al.
660
8
%
336
25
%
368
61
%
2005
Alexander
2000
30
%
—
—
—
—
2009
Serruys, et al.
870
6
%
—
—
—
—
2009
Puskas, et al.
183
18
%
—
—
—
—
* Five and ten year data is not available for those studies
    for which data is not presented in these columns.
Failure of these grafts, typically evidenced by partial or
    complete blockage and reduced or stopped blood flow, can lead to
    chest pain, congestive heart failure, irregular heart beat,
    myocardial infarction, or MI, revascularization or death. A
    repeat of a CABG procedure to repair a failing or failed graft
    is a technically more difficult procedure with mortality rates
    three to five times higher than the original CABG procedure.
eSVS
    MESH—Our Solution
Our eSVS MESH is designed to improve the long-term outcome of
    CABG procedures by addressing limitations of unsupported
    saphenous veins. Our eSVS MESH is a highly flexible,
    semi-compliant, kink-resistant extravascular tubular prosthesis
    made of knitted nickel/titanium, or nitinol, wire mesh. Our eSVS
    MESH is designed to be fitted like a sleeve over vein grafts,
    thereby providing the vein graft with physiological attributes
    similar to those of an artery.
An artery has a thick muscular wall to handle higher pressures,
    and a relatively small lumen that produces higher blood
    velocities, offering less chance for blood to pool and clot. In
    contrast, a vein has a thinner, less muscular wall due to the
    lower pressures normally found in veins and a larger lumen
    designed to maintain these lower pressures. We believe that
    larger, thinner-walled veins will have greater potential benefit
    from our eSVS MESH. Although we are pursuing commercialization
    of a 3.0 mm diameter eSVS MESH in select European markets, in
    the United States we will initially only be pursuing eSVS MESH
    diameters of 3.5, 4.0 and 4.5 mm.
Our eSVS MESH is designed to provide the vein graft with
    physiological attributes similar to those of an artery by
    reducing the lumen diameter and strengthening the vessel wall.
    We believe the key benefits of our eSVS MESH technology include:
•
Structural support designed to inhibit vessel expansion and
    resulting damage to the vessel, which can prevent a thickening
    of the vessel wall over time, or hyperplasia, and resulting
    graft failure.
•
Radial constriction designed to cause the diameter of the graft,
    or lumen, to be consistent in size and more closely match the
    diameter of the target coronary artery to which it is attached,
    thereby increasing blood flow velocities, reducing the potential
    for clot formation, and inhibiting hyperplasia.
•
Compatibility with current CABG procedures, including on-pump or
    off-pump procedures, and open or endoscopic vein harvest
    methods. Except for the placement of our eSVS MESH on the
    saphenous vein graft, the surgical steps to use a saphenous vein
    graft with our eSVS MESH are the same as would be performed for
    any coronary artery bypass procedure utilizing unsupported
    saphenous vein grafts. We do not expect, nor have we seen, a
    significant increase in CABG procedure time due to eSVS MESH use.
Our eSVS MESH technology consists of the following:
•
eSVS MESH (25 cm length, and either 3.0, 3.5, 4.0, or 4.5 mm in
    diameter);
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•
INTRODUCER for use in placing our eSVS MESH on the saphenous
    vein (one for each diameter of our eSVS MESH);
•
SUTURE SNARE for use in loading our eSVS MESH onto the saphenous
    vein; and
•
SIZING TOOL for use in choosing the correct device size based on
    saphenous vein diameter.
Clinical
    Development of our eSVS MESH
International
    Human Clinical Trial
The first human clinical trial of our eSVS MESH is a
    prospective, randomized, controlled non-inferiority trial, where
    each patient is randomized to receive a saphenous vein graft
    with our eSVS MESH to bypass either the right coronary artery,
    or RCA, or the circumflex artery, or Cx, two arteries commonly
    bypassed during CABG. The RCA or Cx saphenous vein graft not
    chosen to receive our eSVS MESH serves as the control artery. To
    ensure Good Clinical Practices compliance, outside resources are
    utilized for data collection and analysis, including a contract
    research organization for data entry and verification, a
    physician clinical events committee for the review and
    evaluation of adverse events, and an angiographic core lab for
    assessment of saphenous vein graft patency.
Seven international centers enrolled 90 patients in this
    trial. Enrollment in this trial closed on July 21, 2009. As
    of March 1, 2010, all 90 patients have been implanted
    for six months or more, 83 patients have been implanted for
    nine months or more, and 50 patients have been implanted
    for 12 months or more.
The international sites involved in this trial, and the number
    of patients enrolled at each site, is provided below:
Number of Patients
Center Name
Enrolled
Schleswig-Holstein University Hospital, Kiel, Germany
25
National University Hospital, Singapore
21
University Of Cape Town, Cape Town, South Africa
20
Hospital Regional De Sion, Sion, Switzerland
9
Auckland City Hospital, Auckland, New Zealand
8
Hospital Universitario 12 de Octubre, Madrid, Spain
5
Prince Charles Hospital, Brisbane, Australia
2
Total
90
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The primary safety endpoint of this trial is statistical
    non-inferiority based on the total rate of major adverse cardiac
    and cerebral events, or MACCE, at
30-days
post-implant as compared to published literature. MACCE is a
    composite of MI, stroke, revascularization, including surgery or
    stenting, and death. In summary, there were four adverse events
    that met the protocol definition of MACCE, which compared
    favorably to the protocol objective performance criteria, or
    OPC. OPC are performance criteria based on broad sets of data
    from historical databases, such as literature or registries,
    that are generally recognized as acceptable values. For this
    trial, the OPC utilized was a compilation of published
    literature that presented
30-day
post-implant MACCE rates for CABG surgery patients, separating
    the MACCE category into the composite factors listed above. In
    addition, none of the adverse events were determined to be
    "Definitely Device Related" or "Probably Device
    Related."
A table summarizing these results is shown below:
Objective
Trial Data
Performance Criteria
MI
2(2.2
%)
2.8
%
Stroke
2(2.2
%)
1.8
%
Revascularization
0
0
%
Death*
0
4.8
%
Total
4(4.4
%)
9.4
%
* One patient death eight months after surgery due to
    non-cardiac causes
The primary effectiveness endpoint of this trial is statistical
    non-inferiority of angiographic stenosis, or patency, of eSVS
    MESH vessels as compared to control vessels at nine-months
    post-implant. A vessel is considered to be patent if there is
    less than 50% stenosis. Collection of this data is ongoing.
We have made the following observations during this trial that
    have led to improvements in the device and implant procedure:
•
One center had implant methods incompatible with our eSVS MESH.
    Specifically, surgeons at this site did not make an adequate
    lateral slit on the side of the saphenous vein graft that lies
    on the heart, or heel slit, in grafts that had our eSVS MESH,
    causing a higher than anticipated number of graft closures at
    the aortic anastomotic site, the location where the saphenous
    vein graft is sewn onto the aorta. By design, a saphenous vein
    graft with an eSVS MESH in place will not dilate. Without this
    heel slit in place, a saphenous vein graft with our eSVS MESH in
    place does not permit adequate blood flow into the vein graft at
    the aortic anastomotic site, potentially resulting in failure of
    the graft. We have modified our instructions for use to provide
    clear direction to surgeons on how to make the heel slit when
    using our eSVS MESH.
•
The amount of reduction in the diameter of the saphenous vein
    grafts, or downsizing, prescribed in our instructions for use
    and sizing tool was too aggressive, resulting in a higher than
    anticipated closure rate in saphenous vein grafts utilizing the
    smaller eSVS MESH diameters. This resulted in lumen diameters
    that were very small and did not remain patent. We have modified
    our instructions for use and sizing tool to decrease the amount
    of downsizing applied to saphenous vein grafts by our eSVS MESH.
United States
    IDE Trial
The FDA is reviewing our application for an IDE which, if
    granted, will allow us to begin clinical trials of our eSVS MESH
    in the United States. We are currently amending our IDE
    application and anticipate obtaining IDE approval in the first
    half of 2010, and if approved, we expect to commence enrollment
    in our IDE trial in the second half of 2010. The FDA has not
    approved our IDE submission and the summary below of the trial
    design is based upon our current expectations of the IDE
    protocol. The ultimate trial design, if and when approved by the
    FDA, may be materially different than our expectations set forth
    below.
We expect that the FDA will require a feasibility phase as part
    of our IDE trial. We are proposing that the first
    60 patients enrolled in the trial will have a
90-day
post-implant assessment of device patency, in addition to normal
follow-ups
prescribed in the clinical trial protocol. We are also proposing
    that success criteria for this
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feasibility analysis be non-inferiority. Once the
90-day
follow-up
is
    completed and the data is reported to the FDA, subject to FDA
    consent, we expect to continue enrollment at all sites and these
    feasibility phase patients will be included in the IDE trial
    data set. The feasibility phase will delay completion of our IDE
    trial by at least five to six months compared to a trial that
    does not incorporate a feasibility phase.
The primary safety endpoint of the IDE trial is expected to be
    statistical non-inferiority based on the total rate of major
    adverse cardiac events, or MACE, at
30-days
post-implant as compared to published literature. The primary
    effectiveness endpoint of this trial is expected to be
    statistical superiority of the patency of eSVS MESH vessels as
    compared to control vessels at nine-months post-implant. This
    effectiveness endpoint is more rigorous than the effectiveness
    endpoint of our international trial, which was a non-inferiority
    comparison. The IDE protocol reflects our prior observations
    from the international trial. For example, the IDE protocol will
    only include eSVS MESH sizes of 3.5 mm or greater in diameter
    and will include detailed instruction regarding preparation of
    anastomotic sites. We expect the IDE trial to require enrollment
    of 366 patients and include up to 20 clinical trial sites.
    Of these 366 patients, we expect that we will be required
    to perform nine-month post-implant angiograph procedures on at
    least 293 patients. We would be dependent upon our clinical
    sites and enrolled subjects for compliance in returning and
    agreeing to the nine-month angiograms and expect that a certain
    percent of subjects will either not return or will refuse the
    nine-month angiogram. We are in discussions with 12 clinical
    trial sites to participate in our IDE trial, six of which have
    been engaged as of April 1, 2010. We expect to commence
    enrollment in the IDE trial, in the second half of 2010.
Enrollment in the IDE trial is expected to take approximately
    18 months, and
follow-up
is
    expected to take up to an additional year from the completion of
    enrollment. Prior to commercializing our eSVS MESH in the United
    States, we will be required to submit a Pre-Market Approval, or
    PMA, application to the FDA. Approval of a PMA by the FDA
    generally takes approximately one year after the application. We
    could be delayed by adverse clinical results or regulatory
    complications, and we may never receive marketing approval.
Preclinical
    Testing
Preclinical trials of our eSVS MESH technology have been
    presented in peer-reviewed journals, including The Journal of
    Thoracic and Cardiovascular Surgery in February 2008 and the
    Journal of Vascular Surgery in June 2009. Between 2002 and 2007,
    Medtronic, Inc. sponsored multiphase trials with the
    Cardiovascular Research Unit of the Christiaan Barnard
    Department of Cardiothoracic Surgery at the University of Cape
    Town in South Africa, or UCT, to evaluate the effects of various
    designs of external nitinol mesh sleeves on the vascular
    architecture of vein grafts used in CABG and peripheral bypass
    procedures. This multiphase research concluded that the use of
    our eSVS MESH showed a statistically significant decrease in
    intimal hyperplasia after six months of implantation. In
    addition to these trials, Medtronic, Inc. and UCT collaborated
    on stress, fatigue, durability, and finite element analysis of
    knitted eSVS MESH designs.
In October 2007, we acquired ownership of the core intellectual
    property relating to our eSVS MESH from Medtronic, Inc. and
    initiated additional work on the technology. This work included
    developing additional sizes of our eSVS MESH, completing
    required preclinical and biological testing of the product and
    accessories, developing packaging and labeling for our eSVS
    MESH, and creating product documentation intended to comply with
    relevant FDA and international standards.
In addition, we initiated and completed a series of animal
    trials utilizing sheep to confirm that our eSVS MESH, as
    manufactured by us, performed as expected, and produced the
    expected results. These animal trials showed a statistically
    significant inhibition of the formation of intimal hyperplasia
    when our eSVS MESH was used with a saphenous vein graft in CABG
    procedures. However, sheep arterial pressures and vasculature
    differ from humans, and human clinical studies may not be
    consistent with animal trial results.
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Additional eSVS
    MESH Applications
Additional development projects based on our eSVS MESH
    technology that we are exploring and may advance include:
Peripheral
    Grafts
In this clinical application, saphenous vein grafts are used to
    bypass obstructed arterial vessels in the legs. We have
    conducted initial preclinical trials for this application,
    utilizing saphenous vein grafts with our eSVS MESH in place. We
    plan to conduct further preclinical trials of this application
    in 2010, in support of future potential regulatory submissions.
Coronary
    Allografts
In this clinical application, cadaver, or allograft, saphenous
    vein grafts are used in CABG procedures for patients who do not
    have appropriate arterial or venous conduits. We have had
    discussions with suppliers of this allograft material to
    determine usage patterns. We plan to conduct initial preclinical
    trials of this application in 2010.
Arteriovenous
    Fistula
In this clinical application, a fistula, or connection, is made
    between an artery and a vein, normally in the non-dominant arm,
    for circulatory system access in patients requiring chronic
    dialysis. We plan to conduct initial preclinical trials of this
    application in 2010.
Sales and
    Marketing
Europe and
    Other International Markets
We have submitted an application to obtain the CE Mark for our
    eSVS MESH. If approved, the CE Mark will allow us to sell our
    eSVS MESH for use in CABG procedures in 32 countries within the
    European Union, the European Economic Area, and the European
    Free Trade Association. Provided we receive CE Mark approval, we
    plan to begin sales in select European nations beginning in the
    second half of 2010. Our plan is to utilize independent
    distributors to commercialize our technology in Europe, and we
    have identified independent distributors that may be contracted
    to conduct sales in these markets. These distributors will be
    supported by our
U.S.-based
staff with regard to training and promotional materials. We
    intend to work with our distributors with respect to product
    reimbursement and have also identified other third parties that
    may be contracted to assist in obtaining country-specific
    product reimbursement.
As the European cardiac surgery market is characterized by
    centralized, high-volume cardiac surgery centers, we believe
    this market can be effectively addressed through a small,
    highly-focused independent distributor network.
We will be an active participant in post-market clinical trials
    aimed at validating the long-term outcomes of patients who
    receive our eSVS MESH. These studies will be designed to show
    that eSVS MESH patients require less revascularization
    procedures than standard CABG patients, thereby also reducing
    the costs associated with revascularization procedures for eSVS
    MESH patients. We envision that the results of these studies
    will be presented at scientific sessions and presented in
    peer-reviewed journals, thereby increasing the visibility and
    adoption of our eSVS MESH. These studies will also be used to
    support applications for public hospital reimbursement in those
    countries that require outcomes data for such reimbursement.
We believe that the CE Mark will also be a gateway approval that
    will allow us to begin regulatory submissions to obtain
    marketing approval in other select markets, including South
    Africa, Canada, Australia, New Zealand and Argentina.
United
    States
We are required to conduct a PMA IDE trial in the United States.
    Enrollment in this trial,
follow-up
of
    trial patients, and subsequent PMA approval are anticipated to
    take approximately three years. If the U.S. IDE trial is
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successful and our resulting PMA is approved, we expect to
    launch our eSVS MESH in the United States no sooner than 2013.
Based upon the 2009 Society of Thoracic Surgeons Adult Cardiac
    Surgery Database, we believe CABG surgeries were performed in
    approximately 1,150 U.S. hospitals in 2009.
According to an article published in the journal Health Affairs
    in 2007, the volume of CABG surgeries performed per
    U.S. hospital in 2003 was:
CABG Volume per Year
Percent of Hospitals in this Category
Number of Hospitals in this Category
<130 cases
29
%
310
130-199
cases
20
%
214
200-314
cases
22
%
235
315-484
cases
15
%
160
>484 cases
14
%
150
Based upon this information, approximately 545 hospitals in the
    United States perform at least 200 CABG surgeries each year. Of
    these, approximately 310 hospitals perform more than 315
    surgeries each year. Our initial marketing focus will be on
    these 300 to 500 hospitals.
Our plan is to utilize independent distributors to commercialize
    our eSVS MESH in the U.S., and we have identified independent
    distributors that may be contracted to conduct sales. These
    distributors will be supported by Kips Bay staff with regard to
    training and promotional materials. We have contracted outside
    reimbursement experts to assist in obtaining Centers for
    Medicare & Medicaid Services, or CMS, product
    reimbursement.
Intellectual
    Property
As of December 31, 2009, we had six patent applications
    pending in the United States and nine patent applications
    pending in countries outside the United States covering various
    aspects of our eSVS MESH. We also have one international patent
    application pending, which gives us the opportunity to file in
    more individual countries. Some of our pending patent
    applications have been examined, and currently stand rejected.
    We will continue to pursue obtaining patents from these
    applications, but it is possible that our pending patent
    applications may not issue as patents or, if issued, may not
    issue in a form that will be advantageous to us. We expect to
    launch our eSVS MESH in Europe before any of our pending
    European patent applications issue as patents.
The core intellectual property relating to our eSVS MESH,
    including five patent applications pending in the United States
    and nine patent applications pending in countries outside the
    United States, was acquired from Medtronic, Inc. pursuant to an
    Assignment and License Agreement dated October 9, 2007.
    Pursuant to the Assignment and License Agreement, Medtronic has
    also assigned to us certain patent rights relating to a brushed
    ePTFE vascular graft, or the Brushed Graft Product, and licensed
    to us certain technology to produce platelet-poor plasma for use
    in connection with the Brushed Graft Product.
As consideration for the assignment of intellectual property
    relating to the eSVS MESH and the Brushed Graft Product, we have
    agreed to pay Medtronic an aggregate of $20.0 million upon
    the achievement of certain sales milestones relating to the eSVS
    MESH and the Brushed Graft Product and a royalty of 4% on sales
    of our eSVS MESH and the Brushed Graft Product. The royalty will
    terminate upon the earlier of the expiration of all of the
    patents and patent applications, or when the aggregate royalties
    paid reach $100.0 million. There is no assurance that any
    of these patent applications will issue as patents or that any
    such patent(s) will be effective to prevent a competitor from
    developing and using substantially equivalent technology.
In the recitals to the Assignment and License Agreement, we
    stated that we would use our reasonable best efforts to develop
    and commercialize both the Brushed Graft Product and the eSVS
    MESH. While we have undertaken activities to develop and
    commercialize the Brushed Graft Product, we are currently
    primarily focused on the development of our eSVS MESH for use in
    CABG surgery and additional applications of our eSVS MESH. Any
    or all licenses granted to us pursuant to our agreement with
    Medtronic may be terminated and potentially all of
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the core intellectual property and patent rights related to our
    eSVS MESH shall revert to Medtronic, upon notice by Medtronic,
    (i) if we become insolvent, make an assignment for the
    benefit of creditors, go into liquidation or receivership or
    otherwise lose legal control of our business; and (ii) if
    we determine to cease commercializing either the Brushed Graft
    Product or our eSVS MESH, then Medtronic may terminate our
    license to patent rights related to the Brushed Graft Product or
    the patent rights related to our eSVS MESH, as applicable. If we
    cease commercialization of the Brushed Graft Product and not the
    eSVS MESH, we believe that Medtronic is entitled to terminate
    only the license to patent rights related to the Brushed Graft
    Product and not the patent rights related to the eSVS MESH.
    Similarly, if we cease commercialization of the eSVS MESH but
    not the Brushed Graft Product, we believe that Medtronic is
    entitled to cause the reversion of the patent rights related to
    the eSVS MESH but not terminate our license to patent rights
    related to the Brushed Graft Product. We recognize, however,
    that the terms of our agreement with Medtronic are susceptible
    to differing interpretations.
Competition
The development and commercialization of medical devices to
    treat cardiovascular disease is a highly competitive industry.
    If approved, our eSVS MESH will compete with current forms of
    treatment, including pharmaceutical treatment, balloon
    angioplasty, coronary stents and conventional CABG surgery.
The key competitive factors affecting the success of our eSVS
    MESH are likely to be the effectiveness, safety profile and
    price of our eSVS MESH, as compared to existing methods for the
    prevention or treatment of cardiovascular disease. The
    commercial success of our eSVS MESH will depend upon the results
    of clinical trials of the technology and experience with the
    technology in the commercial marketplace.
If the commercialization of our eSVS MESH technology is
    successful, it can be expected that other medical device
    companies, many of whom are larger and have greater financial
    resources than us, will seek to enter into this market by
    introducing competing technologies.
Manufacturing and
    Suppliers
We fabricate our eSVS MESH both at our facility and at a
    contract manufacturer. We conduct final assembly and packaging
    inside a controlled environment area within our facility that
    satisfies the requirements of a Class 10,000 level clean
    room. We have implemented systems to ensure that our
    manufacturing operations comply with relevant United States and
    International Good Manufacturing Practices requirements.
We have vendors for all of our key components and outsourced
    processes. We have no sole source suppliers and have identified
    alternate suppliers for each key component and outsourced
    process; however, in some cases, components are provided by
    single source suppliers at this time due to quality
    considerations, costs, or regulatory requirements. We have
    established redundancy for custom equipment used in the
    manufacture of our eSVS MESH. A third-party supplier performs
    sterilization services for our eSVS MESH. We currently use two
    knitting machines that knit the mesh sleeve of our eSVS MESH,
    with one located at our facility and the other located off-site.
    We intend to order two additional knitting machines in the first
    half of 2010. We believe that these four machines will produce
    sufficient quantities of our eSVS MESH to meet our expected
    needs for the foreseeable future. In the event that one or all
    of our knitting machines were to become unavailable, we believe
    that we can obtain one or more replacement knitting machines,
    although the custom work required to enable the machines to
    produce our eSVS MESH would likely result in some delays in our
    production process.
Research and
    Development
During 2007, 2008 and 2009, we incurred approximately $196,000,
    $2.6 million and $3.0 million, respectively, of
    research and development expenses. Research and development
    costs include the costs to design, develop, test, seek approval
    for, and enhance our eSVS MESH and production process. Expenses
    related to research and development consist primarily of
    personnel costs, including salaries, benefits and stock-based
    compensation, product development, pre-clinical and clinical
    trials, materials and supplies, and facilities-related costs.
    While our research and development expenses to date have been
    focused on product development and evaluating the feasibility of
    our eSVS MESH, we expect that a large percentage of our research
    and development expenses in the future will be incurred in
    support of our current and future clinical trials. As we develop
    further applications for
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our eSVS MESH, we intend to utilize internal resources, outside
    contract resources and facilities, and our Scientific Advisory
    Board.
Employees
As of March 1, 2010, we had ten employees. We plan to
    continue to expand our research and development and
    commercialization activities. To support this growth, we will
    need to expand managerial, research and development, operations
    and other functions. None of our employees is represented by a
    labor union, and we consider our relationship with our employees
    to be good.
Facilities
We lease approximately 5,000 square feet of office,
    laboratory, manufacturing and warehouse space at 3405 Annapolis
    Lane North, Suite 200, Minneapolis, Minnesota. The term of
    our lease expires on August 31, 2010. Negotiations are
    underway to extend this lease and to secure additional space.
    Our corporate offices, research and development facilities,
    prototype development, manufacturing, warehousing, and shipping
    facilities are located at this facility.
Government
    Regulation
United States
    Medical Device Regulation
The Federal Food, Drug, and Cosmetic Act, or FDCA, and the
    FDA's implementing regulations, govern medical device
    design and development, preclinical and clinical testing,
    premarket clearance or approval, registration and listing,
    manufacturing, labeling, storage, advertising and promotion,
    sales and distribution, and post-market surveillance. Medical
    devices and their manufacturers are also subject to inspection
    by the FDA. The FDCA, supplemented by other federal and state
    laws, also provides civil and criminal penalties for violations
    of its provisions. We intend to manufacture and market a medical
    device that is regulated by the FDA, comparable state agencies
    and regulatory bodies in other countries.
Our eSVS MESH will require marketing authorization from the FDA
    prior to commercial distribution in the United States. The two
    primary types of FDA marketing authorization are premarket
    notification (also called 510(k) clearance) and premarket
    approval (also called PMA approval). The type of marketing
    authorization applicable to a device—510(k) clearance or
    PMA approval—is generally linked to classification of the
    device. The PMA approval process is generally more stringent,
    time-consuming and expensive than the 510(k) clearance process.
The FDA classifies medical devices into one of three classes
    (Class I, II or III) based on the degree of risk
    FDA determines to be associated with a device and the extent of
    control deemed necessary to ensure the device's safety and
    effectiveness. Devices requiring fewer controls because they are
    deemed to pose lower risk are placed in Class I or II.
    Class I devices are deemed to pose the least risk and are
    subject only to general controls applicable to all devices, such
    as requirements for device labeling, premarket notification, and
    adherence to the FDA's current good manufacturing practice
    requirements, as reflected in its Quality System Regulation, or
    QSR. Class II devices are intermediate risk devices that
    are subject to general controls and may also be subject to
    special controls such as performance standards, product-specific
    guidance documents, special labeling requirements, patient
    registries or postmarket surveillance. Class III devices
    are those for which insufficient information exists to assure
    safety and effectiveness solely through general or special
    controls, and include life-sustaining, life-supporting, or
    implantable devices, and devices not "substantially
    equivalent" to a device that is already legally marketed.
Most Class I devices and some Class II devices are
    exempted by regulation from the 510(k) clearance requirement and
    can be marketed without prior authorization from FDA.
    Class I and Class II devices that have not been so
    exempted are eligible for marketing through the 510(k) clearance
    pathway. By contrast, devices placed in Class III generally
    require PMA approval prior to commercial marketing. To obtain
    510(k) clearance for a medical device, an applicant must submit
    a premarket notification to the FDA demonstrating that the
    device is "substantially equivalent" to a predicate
    device legally marketed in the United States. A device is
    substantially equivalent if, with respect to the predicate
    device, it has the same intended use and (1) the same
    technological characteristics, or (2) has different
    technological characteristics and the information submitted
    demonstrates that the device is as safe
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and effective as a legally marketed device and does not raise
    different questions of safety or effectiveness. A showing of
    substantial equivalence sometimes, but not always, requires
    clinical data. Generally, the 510(k) clearance process can
    exceed 90 days and may extend to a year or more.
After a device has received 510(k) clearance for a specific
    intended use, any modification that could significantly affect
    its safety or effectiveness, such as a significant change in the
    design, materials, method of manufacture or intended use, will
    require a new 510(k) clearance or (if the device as modified is
    not substantially equivalent to a legally marketed predicate
    device) PMA approval. While the determination as to whether new
    authorization is needed is initially left to the manufacturer,
    the FDA may review this determination and evaluate the
    regulatory status of the modified product at any time and may
    require the manufacturer to cease marketing and recall the
    modified device until 510(k) clearance or PMA approval is
    obtained. The manufacturer may also be subject to significant
    regulatory fines or penalties.
Our coronary eSVS MESH has been designated a Class III
    product by the FDA and will be required to go through the PMA
    process. Other indications of our eSVS MESH, including
    peripheral and arteriovenous fistula applications, have not been
    classified at this time.
The FDA will require us to file a PMA application with respect
    to our eSVS MESH and there is no assurance that PMA approval
    will be granted. A PMA application requires the payment of
    significant User Fees, and must be supported by valid scientific
    evidence, which typically requires extensive data, including
    technical, preclinical, clinical and manufacturing data, to
    demonstrate to the FDA's satisfaction the safety and
    effectiveness of the device. A PMA application also must include
    a complete description of the device and its components, a
    detailed description of the methods, facilities and controls
    used to manufacture the device, and proposed labeling. After a
    PMA application is submitted and found to be sufficiently
    complete, the FDA begins an in-depth review of the submitted
    information. During this review period, the FDA may request
    additional information or clarification of information already
    provided. Also during the review period, an advisory panel of
    experts from outside the FDA may be convened to review and
    evaluate the application and provide recommendations to the FDA
    as to the approvability of the device. In addition, the FDA will
    conduct a pre-approval inspection of the manufacturing facility
    to ensure compliance with the QSR, which requires manufacturers
    to follow design, testing, control, documentation and other
    quality assurance procedures.
FDA review of a PMA application is required by statute to take
    no longer than 180 days, although the process typically
    takes significantly longer, and may require several years to
    complete. The FDA can delay, limit or deny approval of a PMA
    application for many reasons, including:
•
the device may not be safe or effective to the FDA's
    satisfaction;
•
the data from our preclinical trials and clinical trials may be
    insufficient to support approval;
•
the manufacturing process or facilities we use may not meet
    applicable requirements; and
•
changes in FDA approval policies or adoption of new regulations
    may require additional data.
If the FDA evaluations of both the PMA application and the
    manufacturing facilities are favorable, the FDA will either
    issue an approval letter, or an approvable letter, which usually
    contains a number of conditions that must be met in order to
    secure final approval of the PMA. When and if those conditions
    have been fulfilled to the satisfaction of the FDA, the agency
    will issue a PMA approval letter authorizing commercial
    marketing of the device for certain indications. If the
    FDA's evaluation of the PMA or manufacturing facilities is
    not favorable, the FDA will deny approval of the PMA or issue a
    not approvable letter. The FDA may also determine that
    additional clinical trials are necessary, in which case the PMA
    approval may be delayed for several months or years while the
    trials are conducted and then the data submitted in an amendment
    to the PMA. The PMA process can be expensive, uncertain and
    lengthy and a number of devices for which FDA approval has been
    sought by other companies have never been approved for
    marketing. Even if a PMA application is approved, the FDA may
    approve the device with an indication that is narrower or more
    limited than originally sought. The agency can also impose
    restrictions on the sale, distribution, or use of the device as
    a condition of approval, or impose post approval requirements
    such as continuing evaluation and periodic reporting on the
    safety, effectiveness and reliability of the device for its
    intended use.
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New PMA applications or PMA supplements may be required for
    modifications to the manufacturing process, labeling, device
    specifications, materials or design of a device that is approved
    through the PMA process. PMA approval supplements often require
    submission of the same type of information as an initial PMA
    application, except that the supplement is limited to
    information needed to support any changes from the device
    covered by the original PMA application and may not require as
    extensive clinical data or the convening of an advisory panel.
Clinical trials are almost always required to support a PMA
    application and are sometimes required for a 510(k) clearance.
    These trials generally require submission of an application for
    an investigational device exemption, or IDE, to the FDA. The IDE
    application must be supported by appropriate data, such as
    animal and laboratory testing results, showing that it is safe
    to test the device in humans and that the testing protocol is
    scientifically sound. The IDE application must be approved in
    advance by the FDA for a specified number of patients, unless
    the product is deemed a non-significant risk device and eligible
    for more abbreviated IDE requirements. Generally, clinical
    trials for a significant risk device may begin once the IDE
    application is approved by the FDA and the trial protocol and
    informed consent are approved by appropriate institutional
    review boards at the clinical trial sites.
FDA approval of an IDE allows clinical testing to go forward,
    but does not bind the FDA to accept the results of the trial as
    sufficient to prove the product's safety and effectiveness,
    even if the trial meets its intended success criteria. With
    certain exceptions, changes made to an investigational plan
    after an IDE is approved must be submitted in an IDE supplement
    and approved by the FDA (and by governing institutional review
    boards when appropriate) prior to implementation.
All clinical trials must be conducted in accordance with
    regulations and requirements collectively known as Good Clinical
    Practice, or GCP. GCPs include the FDA's IDE regulations,
    which describe the conduct of clinical trials with medical
    devices, including the recordkeeping, reporting and monitoring
    responsibilities of sponsors and investigators, and labeling of
    investigation devices. They also prohibit promotion, test
    marketing, or commercialization of an investigational device,
    and any representation that such a device is safe or effective
    for the purposes being investigated. GCPs also include
    FDA's regulations for institutional review board approval
    and for protection of human subjects (informed consent), as well
    as disclosure of financial interests by clinical investigators.
Required records and reports are subject to inspection by the
    FDA. The results of clinical testing may be unfavorable or, even
    if the intended safety and effectiveness success criteria are
    achieved, may not be considered sufficient for the FDA to grant
    approval or clearance of a product. The commencement or
    completion of any of our clinical trials may be delayed or
    halted, or be inadequate to support approval of a PMA
    application or clearance of a premarket notification for
    numerous reasons, including, but not limited to, the following:
•
the FDA or other regulatory authorities do not approve a
    clinical trial protocol or a clinical trial (or a change to a
    previously approved protocol or trial that requires approval),
    or place a clinical trial on hold;
•
patients do not enroll in clinical trials or follow up at the
    rate expected;
•
institutional review boards and third-party clinical
    investigators may delay or reject our trial protocol or changes
    to our trial protocol;
•
third-party clinical investigators decline to participate in a
    trial or do not perform a trial on our anticipated schedule or
    consistent with the clinical trial protocol, investigator
    agreements, good clinical practices or other FDA requirements;
•
third-party organizations do not perform data collection and
    analysis in a timely or accurate manner;
•
regulatory inspections of our clinical trials or manufacturing
    facilities, which may, among other things, require us to
    undertake corrective action or suspend or terminate our clinical
    trials;
•
changes in governmental regulations or administrative actions;
•
the interim or final results of the clinical trial are
    inconclusive or unfavorable as to safety or
    effectiveness; and
•
the FDA concludes that our trial design is inadequate to
    demonstrate safety and effectiveness.
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After a device is approved and placed in commercial
    distribution, numerous regulatory requirements apply. These
    include:
•
establishment registration and device listing;
•
the QSR, which requires manufacturers to follow design, testing,
    control, documentation and other quality assurance procedures;
•
labeling regulations, which prohibit the promotion of products
    for unapproved or "off-label" uses and impose other
    restrictions on labeling;
•
medical device reporting regulations, which require that
    manufacturers report to the FDA if a device may have caused or
    contributed to a death or serious injury or malfunctioned in a
    way that would likely cause or contribute to a death or serious
    injury if malfunctions were to recur; and
•
corrections and removal reporting regulations, which require
    that manufacturers report to the FDA field corrections and
    product recalls or removals if undertaken to reduce a risk to
    health posed by the device or to remedy a violation of the FDCA
    caused by the device that may present a risk to health.
Also, the FDA may require us to conduct postmarket surveillance
    studies or order us to establish and maintain a system for
    tracking our eSVS MESH through the chain of distribution to the
    patient level. The FDA enforces regulatory requirements by
    conducting periodic, announced and unannounced inspections and
    market surveillance. Inspections may include the manufacturing
    facilities of our subcontractors.
Failure to comply with applicable regulatory requirements,
    including those applicable to the conduct of our clinical
    trials, can result in enforcement action by the FDA, which may
    lead to any of the following sanctions:
•
warning letters or untitled letters;
•
fines and civil penalties;
•
unanticipated expenditures;
•
delays in clearing or approving or refusal to clear or approve
    products;
•
withdrawal or suspension of FDA approval;
•
product recall or seizure;
•
orders for physician notification or device repair, replacement,
    or refund;
•
production interruptions;
•
operating restrictions;
•
injunctions; and
•
criminal prosecution.
We and our contract manufacturers, specification developers and
    suppliers are also required to manufacture our eSVS MESH in
    compliance with current Good Manufacturing Practice requirements
    set forth in the QSR. The QSR requires a quality system for the
    design, manufacture, packaging, labeling, storage, installation
    and servicing of marketed devices, and includes extensive
    requirements with respect to quality management and
    organization, device design, buildings, equipment, purchase and
    handling of components, production and process controls,
    packaging and labeling controls, device evaluation,
    distribution, installation, complaint handling, servicing and
    record keeping. The FDA enforces the QSR through periodic
    announced and unannounced inspections that may include the
    manufacturing facilities of our subcontractors. If the FDA
    believes we or any of our contract manufacturers or regulated
    suppliers is not in compliance with these requirements, it can
    shut down our manufacturing operations, require recall of our
    eSVS MESH, refuse to clear or approve new marketing
    applications, institute legal proceedings to detain or seize
    products, enjoin future violations, or assess civil and criminal
    penalties against us or our officers or other employees. Any
    such action by the FDA would have a material adverse effect on
    our business.
Fraud and
    Abuse
Our operations will be directly, or indirectly through our
    customers, subject to various state and federal fraud and
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abuse laws, including, without limitation, the FDCA, federal
    Anti-Kickback Statute and False Claims Act. These laws may
    impact, among other things, our proposed sales, marketing and
    education programs. In addition, these laws require us to screen
    individuals and other companies, suppliers and vendors in order
    to ensure that they are not "debarred" by the federal
    government and therefore prohibited from doing business in the
    healthcare industry. The association or conduct of business with
    a "debarred" entity could be detrimental to our
    operations and result in a negative impact on our business.
The federal Anti-Kickback Statute prohibits persons from
    knowingly and willfully soliciting, offering, receiving or
    providing remuneration, directly or indirectly, in exchange for
    or to induce either the referral of an individual, or the
    furnishing or arranging for a good or service, for which payment
    may be made under a federal healthcare program such as the
    Medicare and Medicaid programs. Several courts have interpreted
    the statute's intent requirement to mean that if any one
    purpose of an arrangement involving remuneration is to induce
    referrals of federal healthcare covered business, the statute
    has been violated. The Anti-Kickback Statute is broad and
    prohibits many arrangements and practices that are lawful in
    businesses outside of the healthcare industry. Many states have
    also adopted laws similar to the federal Anti-Kickback Statute,
    some of which apply to the referral of patients for healthcare
    items or services reimbursed by any source, not only the
    Medicare and Medicaid programs.
The federal False Claims Act prohibits persons from knowingly
    filing or causing to be filed a false claim to, or the knowing
    use of false statements to obtain payment from, the federal
    government. Various states have also enacted laws modeled after
    the federal False Claims Act.
In addition to the laws described above, the Health Insurance
    Portability and Accountability Act of 1996 created two new
    federal crimes: healthcare fraud and false statements relating
    to healthcare matters. The healthcare fraud statute prohibits
    knowingly and willfully executing a scheme to defraud any
    healthcare benefit program, including private payors. The false
    statements statute prohibits knowingly and willfully falsifying,
    concealing or covering up a material fact or making any
    materially false, fictitious or fraudulent statement in
    connection with the delivery of or payment for healthcare
    benefits, items or services.
Voluntary industry codes, federal guidance documents and a
    variety of state laws address the tracking and reporting of
    marketing practices relative to gifts given and other
    expenditures made to doctors and other healthcare professionals.
    In addition to impacting our marketing and educational programs,
    internal business processes will be affected by the numerous
    legal requirements and regulatory guidance at the state, federal
    and industry levels.
If our operations are found to be in violation of any of the
    laws described above or other applicable state and federal fraud
    and abuse laws, we, as well as our employees, may be subject to
    penalties, including civil and criminal penalties, damages,
    fines, exclusion from government healthcare programs, and the
    curtailment or restructuring of our operations. Individual
    employees may need to defend such suits on behalf of us or
    themselves, which could lead to significant disruption in our
    present and future operations. We cannot assure you that we will
    be able to comply with the above laws and regulations.
European
    Medical Device Regulation
The European Union has adopted directives and numerous standards
    that govern and harmonize the national laws and standards
    regulating the design, manufacture, clinical trials, labeling,
    adverse event reporting and post-market surveillance activities
    for medical devices that are marketed in member states.
Compliance with voluntary harmonized standards including ISO
    13845 issued by the International Organization for Standards
    establishes the presumption of conformity with the essential
    requirements for a CE Mark. The International Organization for
    Standardization, or ISO, is a worldwide federation of national
    standards bodies from some 130 countries, established in 1947.
    The mission of the ISO is to promote the development of
    standardization and related activities in the world with a view
    to facilitating the international exchange of goods and
    services. ISO certification is commonly a pre-requisite to use
    of the CE Mark and indicates that a quality system complies with
    standards applicable to activities ranging from initial product
    design and development through production and distribution.
Devices that comply with the requirements of a relevant
    directive will be entitled to bear the CE Mark and, accordingly,
    can be commercially distributed throughout the member states of
    the European Union, and other
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countries that comply with or have adopted these directives. The
    method of assessing conformity varies depending on the type and
    class of the product, but typically involves a combination of
    self-assessment by the manufacturer and a third-party assessment
    by a "Notified Body," an independent and neutral
    institution appointed to conduct conformity assessment. This
    third-party assessment consists of an audit of the
    manufacturer's quality system and technical review of the
    manufacturer's product. An assessment by a Notified Body
    residing within the European Union is required in order for a
    manufacturer to commercially distribute the product throughout
    the European Union. The manufacturer's assessment will
    include a clinical evaluation of the conformity of the device
    with applicable regulatory requirements, which for our eSVS MESH
    will include clinical study results. The clinical data presented
    by us must provide evidence that the products meet the
    performance specifications claimed by us, provide sufficient
    evidence of adequate assessment of unwanted side effects and
    demonstrate that the benefits to the patient outweigh the risks
    associated with the device. We are subject to continued
    surveillance by the Notified Body and are required to report any
    serious adverse incidents to the appropriate authorities of the
    European Union member states.
The Medical Devices Directive, or MDD, covers the regulatory
    requirements of the European Union for medical devices.
    Compliance with the requirements of the MDD is declared by
    placing the CE Mark on the product and supplying the device with
    a declaration of conformity, in which the manufacturer certifies
    that its product complies with the MDD.
Products intended for sale must bear the CE mark to show
    compliance with the MDD. If a Notified Body is involved in the
    approval, the number of the Notified Body must also appear
    adjacent to the CE Mark.
The routes to compliance under the MDD depend on the
    classification of the product:
Class I devices
are low risk, such as stethoscopes,
    hospital beds and wheelchairs. The manufacturer must produce a
    technical file, including product test results compared to
    relevant standards. In addition, manufacturers of sterile
    products and devices with a measuring function must apply to a
    Notified Body for certification of the aspects of manufacture
    relating to sterility or measurement.
Class IIa devices
are low to medium risk, such as
    hearing aids, electrocardiographs and ultrasonic diagnostic
    equipment. As with Class I devices, the manufacturer
    produces a technical file, but a conformity assessment must be
    carried out by a Notified Body, according to one of the
    following routes, at the manufacturer's option:
•
examination and testing of each product or homogenous batch of
    products;
•
audit of the full quality assurance system;
•
audit of the production quality assurance system; or
•
audit of final inspection and testing.
Class IIb devices
are medium-high risk devices, such
    as surgical lasers, infusion pumps, ventilators, intensive care
    monitoring equipment and many implantable devices. Routes to
    compliance are the same as for Class IIa devices, with the
    addition of required examination and testing of the product by
    the Notified Body; however, the full quality assurance route
    does not require type examination and testing.
Class III devices
are high risk, such as balloon
    catheters and prosthetic heart valves. Our eSVS MESH is
    classified as a Class III device. Routes to compliance are:
•
audit of the full quality assurance system and examination of a
    design dossier by the Notified Body. A design dossier is a
    submission similar to a PMA application with the FDA; or
•
examination and testing of the product, together with audit of
    the production quality assurance system.
We are seeking approval to apply the CE Mark to our eSVS MESH in
    order to market our eSVS MESH in the European Union and other
    countries that accept the CE Mark.
Third
    Party Reimbursement
The availability of insurance coverage and reimbursement for
    newly approved medical devices is variable. The commercial
    success of our eSVS MESH in both domestic and international
    markets will be substantially dependent
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on whether third-party coverage and reimbursement is available
    for patients receiving bypass grafts with our eSVS MESH.
    Medicare, Medicaid, health maintenance organizations and other
    third-party payors are increasingly attempting to contain
    healthcare costs by limiting both coverage and the level of
    reimbursement of new medical devices, and, as a result, they may
    not cover or provide additional payment for our eSVS MESH. In
    order to position our device for coverage by third-party payors,
    we may have to agree to a lower net sales price than we might
    otherwise charge. The continuing efforts of governmental and
    commercial third-party payors to contain or reduce the costs of
    healthcare may limit our revenue.
In many countries including the United States, third-party
    payors consist of both government funded insurance programs and
    private insurance programs who cover a significant portion of a
    patient's medical expenses. The trends toward managed
    healthcare in the U.S., and proposed legislation intended to
    reduce the cost of government insurance programs, could
    significantly influence the purchase of healthcare services and
    products, and may result in lower prices for our eSVS MESH or
    the exclusion of our eSVS MESH from reimbursement programs. Even
    before reimbursement may be obtained for our eSVS MESH in the
    United States, FDA approval will be required.
In the United States, CMS is the government entity responsible
    for oversight of the Medicare program. Medicare establishes
    coverage and reimbursement policies at a federal and local level
    for medical products and procedures, and such policies are
    periodically reviewed and updated. While private payors vary in
    their coverage and payment policies, the Medicare program is
    viewed as a benchmark.
There are established codes for CABG procedures and products
    that are payable for both Medicare and commercial payors. There
    are no assurances that our eSVS MESH technology would fall under
    existing policies or reimbursement codes. There are also no
    assurances that existing payment rates for such reimbursement
    codes will continue to hold at the current levels, such as if
    regulatory changes are implemented regarding the methodology for
    calculating hospital payments for current inpatient procedures.
    Medicare payment rates have decreased approximately 10% to 14%
    for those procedures using drug eluting stents. The reductions
    are being transitioned over a three-year period that began in
    fiscal year 2007. In 2007, CMS also implemented a revised
    payment methodology that more accurately reflects the severity
    of the patient's condition.
In the United States, governmental and private sector payors
    have instituted initiatives to limit the growth of healthcare
    costs, using, for example, price regulation or controls and
    competitive pricing programs. Some third-party payors require
    pre-approval of coverage for new or innovative devices or
    therapies before they will reimburse healthcare providers who
    use such devices or therapies.
Providers have also sought ways to manage costs, such as through
    the use of group purchasing organizations. It is our belief that
    the planned economic benefits provided by our eSVS MESH to
    physicians and hospitals through lower revascularization costs
    (PCI
and/or
CABG) will be viewed by providers and third-party payors as
    cost-effective. However, there remains uncertainty whether our
    eSVS MESH will be viewed positively in a cost-avoidance model so
    as to warrant adequate coverage and reimbursement levels.
Medicare reimburses hospital inpatient stays under the Medicare
    Severity Diagnosis-Related Group (MS-DRG) system. The MS-DRG
    system assigns individual cases to an MS-DRG according to the
    patient's diagnoses, the procedures performed, and the
    severity of a patient's condition as identified by the
    presence or absence of complications and comorbidities, or CCs,
    or major CCs, or MCCs. MS-DRGs provide a single bundled payment
    which serves as reimbursement for all items and services
    provided to the Medicare beneficiary during a single
    hospitalization.
Additionally, a relative weight is calculated for each
    individual MS-DRG, which represents the average resources
    required to care for cases within a particular MS-DRG relative
    to the average resources required to treat cases in all MS-DRGs.
    Generally, MS-DRG relative weights are adjusted annually to
    reflect changes in medical practice in a budget neutral manner.
CMS has made no decisions with respect to MS-DRG assignment for
    patients who undergo CABG procedures in which our eSVS MESH
    would be used, and there can be no assurance that the MS-DRG to
    which such patients will be assigned will result in Medicare
    payment levels that are considered by hospitals to be adequate
    to further support purchase of our eSVS MESH.
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Under current CMS reimbursement policies, the agency offers a
    process to obtain add-on payment for a new medical technology
    when the existing MS-DRG prospective payment rate is inadequate.
    To obtain add-on payment, a technology must be considered
    "new," demonstrate substantial improvement above the
    current standard of care and exceed certain payment thresholds.
    Add-on payments are made for no less than two years and no more
    than three years. We must demonstrate the safety and
    effectiveness of our eSVS MESH to the FDA in addition to the CMS
    requirements listed above before add-on payments will be
    approved.
For reporting of physician services, the American Medical
    Association, or AMA, has developed a coding system known as
    Current Procedural Terminology, or CPT. CPT codes are
    established by the AMA and statutorily adopted by all government
    and commercial payors to describe and develop payment amounts
    for physician services. Physician services are reimbursed by
    Medicare based on a physician fee schedule whereby payment is
    based generally on the number of "relative value
    units" assigned by the AMA to each CPT code. No decision
    has been made concerning whether existing CPT codes would be
    appropriate for use in coding CABG procedures when our eSVS MESH
    is used or if separate, new CPT codes are required. We cannot
    assure you that codes used for submitting claims for CABG
    procedures using our eSVS MESH will result in incremental
    payment to physicians. Failure by physicians to receive what
    they consider to be adequate reimbursement for CABG procedures
    in which our eSVS MESH is used could have a material adverse
    effect on our business, financial condition and results of
    operations.
Outside of the United States, there are many reimbursement
    programs through private payors as well as government programs.
    In some countries, government reimbursement is the predominant
    program available to patients and hospitals. While the majority
    of countries have existing reimbursement for CABG procedures and
    products, a number of countries may require us to gather
    additional clinical data before recognizing coverage and
    reimbursement for our eSVS MESH. It is our intent to complete
    the requisite clinical trials and obtain coverage and
    reimbursement approval in countries where it makes economic
    sense to do so.
Post-FDA approval in the United States, we intend to pursue an
    application for a hospital inpatient New Technology Add-On
    Payment. This will allow facilities to be paid an additional
    amount to account for the cost of our eSVS MESH device on top of
    the MS-DRG for the CABG procedure. Should the clinical trial
    results continue to prove a lowering of revascularization rates,
    we believe there is a reasonable chance that CMS will grant our
    request.
Legal
    Proceedings
We are not a party to any pending or threatened litigation.
Scientific
    Advisory Board
Our Scientific Advisory Board is currently comprised of the
    following five practicing cardiac surgeons and one practicing
    cardiologist, who provide feedback on disease states, product
    concepts, product requirements, and preclinical/clinical trial
    designs.
William Cohn, M.D.
: Dr. Cohn is the Director of
    Minimally Invasive Surgical technology at the Texas Heart
    Institute. His specialties include adult cardiac surgery,
    minimally invasive cardiac surgery, off-pump coronary artery
    bypass surgery, and minimally invasive valve surgery. He has
    been involved with the development of numerous products,
    including many products for minimally invasive cardiac surgery.
Robert Emery, M.D.
: Dr. Emery has been a
    cardiovascular and thoracic surgeon for more than 25 years
    and is presently a senior partner of Cardiac Surgical
    Associates, P.A. with practices at St. Josephs Hospital in St.
    Paul, Minnesota, where he is Medical Director of Cardiovascular
    Surgery. Dr. Emery has contributed more than 175 articles
    and 140 scientific abstracts to medical literature and has
    lectured in many parts of the United States and around the
    world. He is active in several professional societies, including
    the American College of Chest Physicians, The Society of
    Thoracic Surgeons, and is the past president of the
    International Society for Minimally Invasive Cardiac Surgery.
Richard Gray, M.D.
: Dr. Gray has been a
    cardiologist since 1975. He is currently a Medical Director with
    Tyler Heart Institute at Community Hospital of Monterey
    Peninsula, California. His specialties include valvular heart
    disease, artificial heart valves, coronary artery disease, and
    preventive cardiology. Dr. Gray has been a cardiologist
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with California Pacific Medical Center in San Francisco,
    California, Director of Cardiovascular Services for
    HealthPartners Medical Group, Minneapolis, Minnesota, Chief of
    Cardiology for Regions Hospital, St. Paul, Minnesota, Chairman
    of the University of North Dakota School of Medicine Department
    of Medicine, Director, Surgical Cardiology, Division of
    Cardiology for Cedars-Sinai Medical Center, Los Angeles,
    California, and Medical Director, Heart Transplant Program at
    Cedars-Sinai Medical Center, Los Angeles, California. He has
    also acted as principal investigator on several cardiac research
    programs over his career.
Stuart Jamieson, M.D.
: Dr. Jamieson is the
    Endowed Chair, Distinguished Professor of Surgery and Chief of
    the Division of Cardiothoracic Surgery for the University of
    California, San Diego School of Medicine. He is also
    Director of the California Heart and Lung Institute. He is known
    throughout the world for his pioneering research and innovative
    surgical therapy. Internationally recognized for his expertise
    in pulmonary thromboendarterectomy, or PTE, he has performed
    more of these specialized operations than all other surgeons in
    the world combined. He is also well known for his skill in both
    adult and pediatric cardiac surgery. The longest surviving
    heart-lung and double lung transplanted patients in the world
    are patients of Dr. Jamieson.
Uwe Klima, M.D.
: Dr. Klima is Chief of
    Cardiothoracic Surgery at the American Hospital in Dubai, UAE.
    Prior to his current position, he was Professor of Surgery for
    Singapore National University Hospital's Department of
    Cardiac, Thoracic and Vascular Surgery and Associate Professor
    of Surgery at Hanover Medical School. He started his training in
    cardiothoracic surgery in Austria. He completed residencies at
    Harvard Medical School and Vienna General Hospital. His
    specialties include adult cardiac surgery, general thoracic
    surgery, minimally invasive surgery, beating heart surgery, and
    peripheral vascular surgery. Dr. Klima is also the author
    or co-author of over 300 publications.
Theo Kofidis, MD, Ph.D, FAHA
: Dr. Kofidis is the
    Associate Professor of Surgery for National University Hospital
    in Singapore. He is also Director of the Robotic Surgery Program
    for National University Hospital. His specialties include adult
    cardiac surgery, transplantation, heart failure surgery, cardiac
    assist devices, minimally invasive cardiac surgery, and
    arrhythmia surgery. He has been recipient of many professional
    honors, holds several patents, and has been author/co-author on
    nearly 100 papers and books in the field of cardiothoracic
    surgery.
Our Scientific Advisory Board members have each received
    nonqualified stock options to purchase 50,000 shares of our
    common stock, which generally vest 25% at grant and 25% each
    year over the subsequent three years on the anniversary of the
    grant date.
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Management
The name, age and position of each of our directors and
    executive officers as of March 1, 2010, and the names of
    certain persons who have agreed to serve as directors upon the
    closing of the offering are as follows:
Executive
    Officers and Directors
Name
Age
Position
Manny Villafaña
69
Chairman of the Board and Chief Executive Officer
Michael P. Winegar
49
Chief Operating Officer, Vice President of Regulatory Affairs,
    and Prospective Director
Scott Kellen
44
Chief Financial Officer, Vice President of Finance, and Secretary
Arch C. Smith(1)(2)(3)
55
Prospective Director
Robert E. Munzenrider(1)(2)(3)
65
Prospective Director
Robert J. Sheehy(1)(2)(3)
52
Prospective Director
(1)
Prospective member of our compensation committee.
    Mr. Sheehy has agreed to serve as the chairman of the
    committee upon his appointment to the board.
(2)
Prospective member of our nominating and governance committee.
    Mr. Munzenrider has agreed to serve as the chairman of the
    committee upon his appointment to the board.
(3)
Prospective member of our audit committee. Mr. Munzenrider
    has agreed to serve as the chairman of the committee upon his
    appointment to the board.
Manny Villafaña
is our founder, and has been our
    Chairman of the Board and Chief Executive Officer since our
    inception in 2007. Prior to founding us and since 1999,
    Mr. Villafaña founded and served as Chairman of the
    Board and Chief Executive Officer of CABG Medical, Inc., formed
    to develop an artificial coronary graft for use in bypass
    surgery. From 1987 to 2004, Mr. Villafaña founded and
    served as Chairman of the Board and Chief Executive Officer of
    ATS Medical, Inc., which developed the latest generation of
    open-pivot mechanical heart valves. From 1976 to 1982,
    Mr. Villafaña founded and served as President and
    Chairman of the Board of St. Jude Medical, Inc., leading the
    company's development of a novel heart valve that still
    dominates the mechanical valve replacement market. From 1972 to
    1976, Mr. Villafaña founded and served as President
    and Chairman of the Board of Cardiac Pacemakers, Inc., or CPI, a
    cardiac rhythm management company that introduced a long life
    lithium iodine pacemaker that became and continues to be the
    standard of care in the pacemaker market. CPI was ultimately
    acquired by Eli Lilly and Company, which spun out CPI as Guidant
    Corporation. Guidant was, in turn, purchased by Boston
    Scientific Corporation.
Mr. Villafaña has received numerous awards and honors,
    including the "Living Legend of Medicine" award from
    the International Society of Cardio Thoracic Surgeons, the Ellis
    Island Medal of Honor, the Grand Prize
    Recipient—Mediterranean Institute of Cardiology, the
    Ernst & Young LLP National Master Entrepreneur of the
    Year, the Top 100 Hispanics in the USA, the Boys and Girls Club
    of America Hall of Fame, and induction into the Minnesota
    Business Hall of Fame. We believe that
    Mr. Villafaña's nearly 40 years of
    experience in healthcare, his proven and respected leadership,
    and his deep commitment to us as our founder will be valuable in
    helping to guide us in the years ahead.
Michael P. Winegar
joined us as Chief Operating Officer
    and Vice President of Regulatory Affairs in September 2007. From
    2006 to September 2007, Mr. Winegar was the Vice President
    of Regulatory and Quality at Enpath Medical, Inc., up to
    and through the company's acquisition by Greatbatch, Inc.
    While at Enpath, Mr. Winegar oversaw the regulatory and
    quality functions of various Class II and III devices
    and coordinated relevant functions for facility consolidations.
    From 2001 to 2005, Mr. Winegar was a founding employee of
    ev3 Inc., holding various management positions in the Regulatory
    Affairs, Clinical Research, and Quality Assurance departments.
    From 2000 to 2001, Mr. Winegar was the Vice President of
    Regulatory Affairs, Clinical Research, and Quality Assurance for
    Myocor, Inc., where he oversaw the first chronic implants of
    Myocor heart failure therapy technologies.
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Mr. Winegar began his career with positions at Medical
    Incorporated, Medtronic, Inc., SciMed Life Systems Inc., and
    Boston Scientific Corporation. Mr. Winegar has also acted
    as a medical device industry consultant in the areas of
    regulatory affairs, quality assurance, and clinical research.
    Mr. Winegar has agreed to join our board of directors upon
    the closing of this offering. We believe that
    Mr. Winegar's experience in the regulatory affairs and
    clinical research fields, coupled with his knowledge of our eSVS
    MESH technology, will bring valuable insight to our board.
Scott Kellen
joined us as Chief Financial Officer, Vice
    President of Finance, and Secretary in February 2010. From 2007
    to 2009, Mr. Kellen served as Director of Finance for
    Transoma Medical, Inc., including during the preparation of its
    proposed initial public offering, which was withdrawn in
    February 2008 due to deteriorated market conditions. From 2005
    to 2007, Mr. Kellen served as the Corporate Controller for
    ev3 Inc. during the company's initial public offering and
    during additional follow-on offerings. From 2003 to 2005,
    Mr. Kellen served as Senior Audit Manager of
    Deloitte & Touche, LLP (now Deloitte LLP), providing
    auditing and consulting services to mid-size public companies
    after the passage of the Sarbanes-Oxley Act. Altogether,
    Mr. Kellen has spent more than 12 years in the medical
    device industry, serving early stage and growth companies that
    produced Class II and III devices. Mr. Kellen
    began his career with Deloitte & Touche in 1987.
Arch C. Smith
is currently, and has been since April
    2005, a Venture Partner at Sight Line Partners, a venture
    capital firm focused on investments in later stage private
    medical device companies. 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 served on the
    board of directors for CABG Medical, Inc. from 2004 to 2006.
    Mr. Smith serves on the board of the Minneapolis Heart
    Institute Foundation. Mr. Smith has agreed to join our
    board of directors upon the closing of this offering. We believe
    that, as a successful venture capitalist, Mr. Smith will
    bring important strategic insight to our board, as well as a
    wealth of experience working with the investment community.
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
    has served on the board of directors for ATS Medical, Inc. since
    2003 and on the board of directors for Viad Corp since 2004.
    Mr. Munzenrider also served on the board of directors for
    Criticare Systems, Inc. from 2007 to 2008 and the board of
    directors for CABG Medical, Inc. from 2004 to 2006. He is also a
    Trustee Emeritus on the University of Montana Foundation.
    Mr. Munzenrider has agreed to join our board of directors
    upon the closing of this offering. We believe that
    Mr. Munzenrider's significant leadership experience in
    consumer-focused industries will add valuable expertise and
    insight to our board.
Robert J. Sheehy
is a retired health insurance industry
    executive. From 2007 to 2008, Mr. Sheehy served as Senior
    Vice President for UnitedHealth Group, Inc. From 2000 to 2007,
    Mr. Sheehy served as Chief Executive Officer of
    UnitedHealthcare, Inc., a division of UnitedHealth Group. From
    April 1998 to December 2000, Mr. Sheehy was President of
    UnitedHealthcare. Prior to April 1998, Mr. Sheehy served in
    various capacities with UnitedHealth Group. Mr. Sheehy has
    agreed to join our board of directors upon the closing of this
    offering. We believe that Mr. Sheehy will bring strategic
    insight and leadership and a wealth of experience in healthcare
    to our board, as well as knowledge of regulations and issues
    facing healthcare providers and medical device companies.
Director
    Independence
Our board of directors has reviewed the materiality of any
    relationship that each of our directors and prospective
    directors has with us, either directly or indirectly. Based on
    this review, our board has determined that the following
    prospective directors will be "independent directors"
    as defined by Rule 5605(a)(2) of the Marketplace
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Rules of The NASDAQ Stock Market, or NASDAQ, at the time they
    become directors upon the closing of the offering:
    Messrs. Smith, Munzenrider, and Sheehy.
Committees of the
    Board of Directors
Our board of directors has provided for the establishment of an
    audit committee, a compensation committee and a nominating and
    governance committee effective upon the closing of this
    offering. The composition and function of each of these
    committees is described below.
Audit
    Committee
Our audit committee will be comprised of Mr. Munzenrider
    (chairman), Mr. Smith and Mr. Sheehy. Our board of
    directors has determined that Mr. Munzenrider is an audit
    committee financial expert, as defined by the rules of the
    Securities and Exchange Commission. Our audit committee will be
    authorized to:
•
approve and retain the independent registered public accounting
    firm to conduct the annual audit of our financial statements;
•
review the proposed scope and results of the audit;
•
review and pre-approve audit and non-audit fees and services;
•
review accounting and financial controls with the independent
    auditors and our financial and accounting staff;
•
review and approve transactions between us and our directors,
    officers and affiliates;
•
recognize and prevent prohibited non-audit services; and
•
establish procedures for complaints received by us regarding
    accounting matters; oversee internal audit functions, if any.
We believe that the composition of our audit committee will meet
    the independence requirements of the applicable rules of the
    Securities and Exchange Commission and NASDAQ upon completion of
    this offering.
Compensation
    Committee
Upon the closing of the offering, our compensation committee
    will be comprised of Mr. Sheehy (chairman),
    Mr. Munzenrider and Mr. Smith. All members of the
    compensation committee will qualify as independent under the
    current definition promulgated by NASDAQ. Our compensation
    committee will be authorized to:
•
review and recommend the compensation arrangements for
    management;
•
establish and review general compensation policies with the
    objective to attract and retain superior talent, to reward
    individual performance and to achieve our financial goals;
•
administer our stock incentive and purchase plans; and
•
oversee the evaluation of the board of directors and management.
Nominating and
    Governance Committee
Upon the closing of the offering, our nominating and governance
    committee will be comprised of Mr. Munzenrider (chairman),
    Mr. Smith and Mr. Sheehy. All members of the
    nominating and governance committee will qualify as independent
    directors under the current definition promulgated by NASDAQ.
    Our nominating and governance committee will be authorized to:
•
identify and nominate candidates for election to the board of
    directors; and
•
develop and recommend to the board of directors a set of
    corporate governance principles applicable to our company.
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Compensation
    Committee Interlocks and Insider Participation
No prospective member of our compensation committee has at any
    time been an employee of ours. None of our executive officers
    serves as a member of the board of directors or compensation
    committee of any other entity that has one or more executive
    officers serving as a member of our board of directors or
    compensation committee.
Code of Business
    Conduct and Ethics
We have adopted a code of business conduct and ethics that
    applies to all of our employees, officers and directors,
    including those officers responsible for financial reporting.
    The code of business conduct and ethics is available on our
    website at www.kipsbaymedical.com. We expect that any amendments
    to the code, or any waivers of its requirements, will be
    disclosed on our website.
Limitation of
    Directors' and Officers' Liability and
    Indemnification
The Delaware General Corporation Law authorizes corporations to
    limit or eliminate, subject to specified conditions, the
    personal liability of directors to corporations and their
    stockholders for monetary damages for breach of their fiduciary
    duties. Our certificate of incorporation and amended and
    restated bylaws limit the liability of our directors to the
    fullest extent permitted by Delaware law.
We have obtained director and officer liability insurance to
    cover liabilities our directors and officers may incur in
    connection with their services to us. Our certificate of
    incorporation and amended and restated bylaws also provide that
    we will indemnify and advance expenses to any of our directors
    and officers who, by reason of the fact that he or she is one of
    our officers or directors, is involved in a legal proceeding of
    any nature. We will repay certain expenses incurred by a
    director or officer in connection with any civil, criminal,
    administrative or investigative action or proceeding, including
    actions by us or in our name. Such indemnifiable expenses
    include, to the maximum extent permitted by law, attorney's
    fees, judgments, fines, settlement amounts and other expenses
    reasonably incurred in connection with legal proceedings. A
    director or officer will not receive indemnification if he or
    she is found not to have acted in good faith and in a manner he
    or she reasonably believed to be in, or not opposed to, our best
    interest.
We have entered into agreements to indemnify our directors and
    officers and intend to enter into these agreements in the
    future. These agreements provide that we will, among other
    things, indemnify and advance expenses to our directors and
    officers for certain expenses, including attorneys' fees,
    judgments, fines and settlement amounts incurred by any such
    person in any action or proceeding, including any action by us
    arising out of such person's services as our director or
    officer, or any other company or enterprise to which the person
    provides services at our request. We believe that these
    provisions and agreements are necessary to attract and retain
    qualified persons as directors and officers.
Such limitation of liability and indemnification does not affect
    the availability of equitable remedies. In addition, we have
    been advised that in the opinion of the Securities and Exchange
    Commission, indemnification for liabilities arising under the
    Securities Act of 1933, as amended, is against public policy as
    expressed in the Securities Act and is therefore unenforceable.
There is no pending litigation or proceeding involving any of
    our directors, officers, employees or agents in which
    indemnification will be required or permitted. We are not aware
    of any threatened litigation or proceeding that may result in a
    claim for such indemnification.
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Director
    Compensation
Until the closing of this offering, Manny Villafaña will be
    our sole director and the chairman of our board of directors.
    Mr. Villafaña is not compensated for his services as a
    director. Messrs. Smith, Munzenrider, Sheehy and Winegar
    have agreed to join our board of directors immediately following
    this offering.
Upon the closing of the offering, Messrs. Smith,
    Munzenrider, and Sheehy, as our non-employee directors, will
    each be paid:
•
an annual retainer of $18,000;
•
a meeting attendance fee of $1,250 per meeting;
•
a committee meeting attendance fee of $1,500 and $1,000 per
    meeting for chairs and members, respectively; and
•
stipends of $3,000 and $5,000 for the chairmen of the
    compensation and audit committees, respectively.
Upon joining the board, each non-employee director will receive
    30,000 shares of common stock, which will vest in four
    annual increments, beginning with the one-year anniversary of
    the director's appointment to the board. At this time, we
    do not have a policy regarding annual grants of common stock to
    our non-employee directors.
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Executive
    Compensation
In light of our limited operating history, small management
    team, and single-member board structure, we have elected not to
    provide a compensation discussion and analysis in this
    prospectus as allowed under the smaller reporting company
    disclosure rules of the SEC applicable to us.
Overview
In this section, we describe our compensation programs and
    policies and the material elements of compensation for the year
    ended December 31, 2009 for our Chairman and Chief
    Executive Officer, who also served as our Chief Financial
    Officer in fiscal year 2009, and our Chief Operating Officer and
    Vice President of Regulatory Affairs. We refer to these persons
    as our "named executive officers" elsewhere in this
    prospectus. We did not have any other executive officers in
    fiscal year 2009, and, except for Scott Kellen, who joined us as
    our Chief Financial Officer, Vice President of Finance, and
    Secretary in February 2010, we have not hired any additional
    executive officers to date.
Decisions on the components of our compensation programs are,
    until the closing of this offering, the responsibility of our
    Chief Executive Officer and Chairman. Upon the closing of this
    offering, our compensation committee will be responsible for
    reviewing and evaluating these components, including employee
    base salaries and benefit plans. The compensation committee will
    provide advice and recommendations to the board of directors on
    such matters. See "Committees of the Board of
    Directors—Compensation Committee" for further details
    on the role of the compensation committee.
Employment
    Agreements
Manny
    Villafaña
We entered into an employment agreement with
    Mr. Villafaña on July 19, 2007. This agreement
    provided for an initial base salary of $275,000, which was
    increased to $304,500 in 2009. Mr. Villafaña may be
    awarded discretionary bonuses as determined by our board of
    directors and is entitled to participate in any employee benefit
    plans we sponsor.
Pursuant to the employment agreement, if we terminate
    Mr. Villafaña's employment without cause, he is
    entitled to his base salary for the entire term of the
    employment agreement, which expires on July 1, 2012. For
    benefits payable upon a change in control, see "Severance
    Benefits and Change in Control Arrangements."
The employment agreement also contains provisions relating to
    confidential information, requiring Mr. Villafaña to
    refrain from disclosing any of our proprietary information, and
    to assignment of inventions, obligating Mr. Villafaña
    to assign to us any inventions which directly concern our eSVS
    MESH or future products, research, or development, or which
    result from work he performs for us or using our facilities.
    Further, Mr. Villafaña's employment agreement
    contains certain provisions concerning his post-employment
    activities. Pursuant to the agreement, he has agreed not to
    compete with us for a period of two years after the termination
    of his employment, provided that we make a monthly payment to
    Mr. Villafaña equal to his base salary rate at the
    time of termination, adjusted based upon changes in the consumer
    price index, beginning with the first month after termination of
    employment and continuing until the non-competition provision
    expires. Such two-year non-competition period will automatically
    be extended by one year increments, up to a total of five years,
    unless terminated by us, provided we continue making the monthly
    payments set forth above. Mr. Villafaña will also be
    entitled to continue his participation in our medical benefits
    plan for the term of the non-competition provision, provided he
    continues to pay the employee portion of the premium. Following
    the termination of his employment with us,
    Mr. Villafaña has also agreed to consult on
    non-confidential matters at the request of our board of
    directors.
Michael P.
    Winegar and Scott Kellen
We entered into employment agreements with Mr. Winegar on
    September 1, 2007 and Mr. Kellen on February 8,
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2010. Mr. Winegar's employment agreement provided for
    an initial base salary of $175,000, which was increased to
    $210,000 in 2009. Mr. Kellen's employment agreement
    provided for an annual base salary of $185,000. As explained
    further in "Overview" above, these compensation
    amounts were determined by our Chief Executive Officer and
    Chairman.
Mr. Winegar and Mr. Kellen are both at-will employees.
    Therefore, their employment agreements do not have defined
    terms, and may be terminated by the executive or by us for any
    reason or no reason with ten days prior notice.
Although we may, in our discretion, provide Mr. Winegar or
    Mr. Kellen with severance benefits upon termination of his
    employment, neither executive is entitled to severance benefits.
    For benefits payable upon a change in control, see
    "Severance Benefits and Change in Control
    Arrangements."
Pursuant to non-competition and non-solicitation provisions of
    their employment agreements, both Mr. Winegar and
    Mr. Kellen have agreed not to compete with us for a period
    of one year following termination of their employment. The
    employment agreements also contain provisions relating to
    confidential information and assignment of inventions, which
    require Mr. Winegar and Mr. Kellen to refrain from
    disclosing any of our proprietary information and to assign to
    us any inventions which directly concern our eSVS MESH or future
    products, research, or development, or which result from work
    they perform for us or using our facilities.
Base
    Salary
Base salaries for our named executive officers are established
    based on the executive's level of responsibility and years
    of experience, taking into account competitive trends. Base
    salaries of all employees, including executive officers, are
    reviewed annually and may be increased for merit reasons or due
    to overall company performance.
Equity
    Awards
Equity awards to our named executive officers generally consist
    of incentive stock options. For a description of the terms and
    conditions of our stock option plan, see "Employee Benefit
    Plans—2007 Long-Term Incentive Plan."
Upon commencement of his employment with us, Mr. Winegar
    received an incentive stock option to purchase
    50,000 shares of our common stock at an exercise price of
    $1.00 per share. One-quarter of the total number of shares
    subject to the option vested on each of September 1, 2008
    and 2009, and an additional one-quarter of the total number of
    shares will vest on each of September 1, 2010 and 2011. In
    June 2008, January 2009, September 2009, and January 2010,
    Mr. Winegar received additional incentive stock options to
    purchase 10,000, 30,000, 10,000, and 25,000 shares,
    respectively, of our common stock at exercise prices per share
    of $5.83, $5.83, $6.00, and $7.00, respectively. Each of these
    option grants vests, in the aggregate, as to one-fourth of the
    shares on the first anniversary of the grant date and annually
    thereafter until the fourth anniversary of the grant date.
There were no options exercised by any of our named executive
    officers during 2009.
Non-Equity
    Incentive Compensation
We did not award any non-equity incentive compensation to any of
    our named executive officers in 2009.
Retirement Plan
    and Other Benefits
We offer a SIMPLE IRA plan and health, disability, and life
    insurance to our full-time employees, including our named
    executive officers. For a description of the terms and
    conditions of our SIMPLE IRA plan, see "Employee Benefit
    Plans—Retirement Plan and Other Benefits."
Nonqualified
    Deferred Compensation
None of our named executive officers participate in or have
    account balances in nonqualified defined contribution plans or
    other deferred compensation plans maintained by us.
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Perquisites and
    Other Personal Benefits
We provide Mr. Winegar with a car allowance of $500 per
    month.
Severance
    Benefits and Change in Control Arrangements
We have agreed to provide the severance benefits and change in
    control arrangements described below to our named executive
    officers.
Manny
    Villafaña
Pursuant to his employment agreement, if we terminate
    Mr. Villafaña's employment without cause, he is
    entitled to his base salary for the entire term of the
    agreement. The agreement will expire on July 1, 2012.
Pursuant to the agreement, Mr. Villafaña has agreed
    not to compete with us for a period of two years after the
    termination of his employment, subject to extension by us for
    three additional years, provided that we make a monthly payment
    to Mr. Villafaña equal to his base salary rate at the
    time of termination, adjusted based upon changes in the consumer
    price index, beginning with the first month after termination of
    employment and continuing until the non-competition provision
    expires. Mr. Villafaña will also be entitled to
    continue his participation in our medical benefits plan,
    provided he continues to pay the employee portion of the
    premium. Such benefits will continue until the expiration of the
    non-competition provision, which, as discussed in
    "Employment Agreements" above, will be a period of not
    less than two years and not more than five years.
We also entered into a change in control agreement with
    Mr. Villafaña on September 12, 2008. Under the
    terms of this agreement, if, within 24 months of a change
    in control, Mr. Villafaña's employment is
    terminated by us other than for cause, or if he resigns for good
    reason, Mr. Villafaña will be entitled to a prorated
    portion of any annual incentive bonus for the fiscal year in
    which the termination occurs and a severance benefit equal to
    three years of his base salary. The change in control agreement
    will expire on September 12, 2011, but will be
    automatically extended by one-year increments thereafter unless
    either party provides written notice to the other of the intent
    not to extend the agreement.
Michael P.
    Winegar and Scott Kellen
Under the terms of their employment agreements, neither
    Mr. Winegar nor Mr. Kellen is entitled to any
    severance benefits upon termination of employment. However, we
    may, in our sole discretion, provide them with severance
    benefits.
We entered into change in control agreements with
    Mr. Winegar, effective September 12, 2008, and
    Mr. Kellen, effective February 8, 2010. Under the
    terms of these agreements, if, within 24 months of a change
    in control, either executive is terminated by us for a reason
    other than cause or resigns for good reason, he will be entitled
    to a prorated portion of any annual incentive bonus for the
    fiscal year in which the termination occurs and a severance
    benefit equal to two years of his base salary. The change in
    control agreements expire three years from their effective
    dates, but will be automatically extended by one-year increments
    unless either party provides written notice to the other of the
    intent not to extend the agreement.
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Summary
    Compensation Table for 2009
The following table provides information regarding the
    compensation earned during the year ended December 31, 2009
    by our Chairman and Chief Executive Officer, who also served as
    our Chief Financial Officer in fiscal year 2009, and our Chief
    Operating Officer and Vice President of Regulatory Affairs. We
    refer to these persons as our "named executive
    officers" elsewhere in this prospectus. We did not have any
    other executive officers in 2009, and, except for Scott Kellen,
    who joined us as our Chief Financial Officer, Vice President of
    Finance, and Secretary in February 2010, we have not hired any
    additional executive officers to date.
Option
All Other
Salary
Awards
Compensation
Total
Name and Principal Position
Year
($)
($)(1)
($)(2)
($)
Manny Villafaña
2009
$
304,500
$
—
$
8,901
$
313,401
Chairman and Chief
Executive Officer(3)
Michael Winegar
2009
210,000
114,131
12,128
336,259
Chief Operating Officer
and Vice President of Regulatory Affairs
(1)
The value of each of the option awards was computed in
    accordance with FASB ASC Topic 718 without consideration of
    forfeitures. Valuation assumptions are described in the notes to
    financial statements appearing elsewhere in this prospectus. See
    the table entitled "Outstanding Equity Awards at Fiscal
    Year End" and our discussion of stock-based compensation
    under "Equity Awards." Each stock option is an
    incentive stock option with a ten-year term, and vests, in the
    aggregate, as to one-fourth of the shares on the first
    anniversary of the grant date and annually thereafter until the
    fourth anniversary of the grant date.
(2)
Represents our match of Mr. Villafaña's and
    Mr. Winegar's 2009 contributions to their SIMPLE IRA
    accounts. See our discussion of our SIMPLE IRA plan under
    "Employee Benefit Plans—Retirement Plan and Other
    Benefits. The amount provided for Mr. Winegar also
    represents the $6,000 car allowance discussed under
    "Perquisites and Other Benefits."
(3)
In addition to his roles as Chairman and Chief Executive
    Officer, Mr. Villafaña also served as Chief Financial
    Officer in fiscal year 2009.
Outstanding
    Equity Awards at December 31, 2009
The following table sets forth certain information regarding
    outstanding equity awards granted to our named executive
    officers as of December 31, 2009. Since our inception,
    Mr. Winegar is the only named executive officer who has
    been granted an option award. Each award was granted pursuant to
    our 2007 Long-Term Incentive Plan.
Option Awards
Number of
Number of
Securities
Securities
Underlying
Underlying
Unexercised
Unexercised
Option
Option
Options
Options
Exercise
Expiration
Name
Grant Date
Exercisable
Unexercisable
Price
Date
Michael Winegar
9/1/2007
25,000
(1)
25,000
(1)
$
1.00
9/1/2017
6/1/2008
2,500
(2)
7,500
(2)
5.83
6/1/2018
1/1/2009
7,500
(3)
22,500
(3)
5.83
1/1/2019
9/4/2009
—
10,000
(4)
6.00
9/4/2019
(1)
Represents shares granted pursuant to an incentive stock option
    agreement for an aggregate of 50,000 shares of our common
    stock. This option vests in four annual installments beginning
    on September 1, 2008.
(2)
Represents shares granted pursuant to an incentive stock option
    agreement for an aggregate of 10,000 shares of our common
    stock. This option vests in four annual installments beginning
    on June 1, 2009.
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(3)
Represents shares granted pursuant to an incentive stock option
    agreement for an aggregate of 30,000 shares of our common
    stock. This option vests in four annual installments beginning
    on January 1, 2010.
(4)
Represents shares granted pursuant to an incentive stock option
    agreement for an aggregate of 10,000 shares. This option
    vests in four annual installments beginning on September 4,
    2010.
Employee Benefit
    Plans
2007 Long-Term
    Incentive Plan
Our 2007 Long-Term Incentive Plan, or the 2007 Plan, was adopted
    by our board of directors and approved by our stockholders on
    July 27, 2007. The 2007 Plan will expire in July 2017,
    unless sooner terminated by our board of directors.
Stock
    Awards
Under the 2007 Plan, we may grant incentive stock options,
    nonqualified stock options, restricted stock awards, stock
    appreciation rights, and other performance awards to our
    officers, directors, employees, consultants, and advisors.
Administration
The 2007 Plan is administered by our board of directors and our
    compensation committee, collectively referred to as the plan
    administrator, which has the authority to grant awards,
    determine award recipients, dates of grant, the numbers and
    types of stock awards to be granted and to set the terms of
    these awards, including the exercise price, vesting periods and
    the period of exercisability.
Share
    Reserve
As of December 31, 2009, there were 1,999,000 shares
    of our common stock reserved, but only 1,401,000 shares of
    our common stock available for issuance under the 2007 Plan. As
    of December 31, 2009, there were outstanding options to
    purchase 598,000 shares of our common stock under the 2007
    Plan. Options for an additional 185,000 shares of our
    common stock were granted in 2010 and were outstanding as of
    March 1, 2010. Accordingly, as of March 1, 2010, there
    were outstanding options to purchase an aggregate of
    783,000 shares of our common stock under the 2007 Plan and
    1,216,000 shares of our common stock available for future
    grant. The maximum number of shares that may be issued pursuant
    to the exercise of incentive stock options under the 2007 Plan
    is equal to 2,000,000 shares.
If a stock award granted under the 2007 Plan expires or
    otherwise terminates without being exercised in full, or is
    settled in cash, the shares of common stock not acquired
    pursuant to the stock award again become available for
    subsequent issuance under our 2007 Plan. In addition, the
    following types of shares under the 2007 Plan may become
    available for the grant of new stock awards under the 2007 Plan:
    (a) shares that are forfeited prior to becoming fully
    vested; (b) shares withheld to satisfy income or employment
    withholding taxes; (c) shares used to pay the exercise
    price of an option in a net share settlement; and
    (d) shares tendered to us to pay the exercise price of an
    option. Shares issued under the 2007 Plan may be previously
    unissued shares or reacquired shares bought on the open market.
Stock
    Options
Incentive and nonqualified stock options are granted pursuant to
    incentive and nonqualified stock option agreements adopted by
    the plan administrator. The plan administrator determines the
    exercise price for a stock option, within the terms and
    conditions of the 2007 Plan, provided that the exercise price of
    an incentive stock option cannot be less than 100% of the fair
    market value of our common stock on the date of grant. Options
    granted under our 2007 Plan vest at the rate specified by the
    plan administrator.
The plan administrator determines the term of stock options
    granted under our 2007 Plan. Incentive stock options may be
    granted for terms up to a maximum of 10 years, except in
    the case of certain incentive stock options, as described below.
    Stock options generally are not transferable except by will, or
    the laws of descent and distribution unless, in the case of
    nonqualified stock options, permitted by the plan administrator.
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Acceptable consideration for the purchase of common stock issued
    upon the exercise of a stock option will be determined by the
    plan administrator and may include (a) cash, personal check
    or certified check or (b) the tender of common stock
    previously owned by the optionholder.
Limitations on
    Incentive Stock Options
No incentive stock option may be granted to any person who, at
    the time of the grant, owns or is deemed to own stock possessing
    more than 10% of our total combined voting power or that of any
    of our affiliates unless (a) the option exercise price is
    at least 110% of the fair market value of the stock subject to
    the option on the date of grant and (b) the term of the
    incentive stock option does not exceed five years from the date
    of grant.
Restricted Stock
    Awards
Restricted stock awards are granted pursuant to restricted stock
    agreements adopted by the plan administrator. Shares of common
    stock acquired under a restricted stock award may, but need not,
    be subject to a risk of forfeiture in our favor in accordance
    with a vesting schedule to be determined by the plan
    administrator. No restricted stock award may be transferred,
    other than by will or the laws of descent and distribution,
    prior to the date any risks of forfeiture described in the
    restricted stock agreement have lapsed.
Stock
    Appreciation Rights
Stock appreciation rights are granted pursuant to stock
    appreciation right agreements adopted by the plan administrator.
    The plan administrator determines the strike price for a stock
    appreciation right which, unless otherwise determined by the
    plan administrator, cannot be less than 100% of the fair market
    value of our common stock on the date of grant. Upon the
    exercise of a stock appreciation right, we will pay the
    participant an amount equal to the product of (a) the
    excess of the per share fair market value of our common stock on
    the date of exercise over the strike price, multiplied by
    (b) the number of shares of common stock with respect to
    which the stock appreciation right is exercised. A stock
    appreciation right granted under the 2007 Plan vests at the rate
    specified in the stock appreciation right agreement as
    determined by the plan administrator.
Performance
    Awards
The 2007 Plan permits the grant of performance unit awards that
    shall consist of monetary awards that may be earned if the
    company or award recipient achieves certain performance
    objectives established by the plan administrator over a
    specified performance periods and performance share awards shat
    consist of shares of our common stock that may be earned or
    become vested in whole or in part if the Company or award
    recipient achieves certain performance objectives established by
    the plan administrator over a specified performance period.
Changes to
    Capital Structure
In the event that there is a specified type of change in our
    capital structure, such as a stock split, appropriate
    adjustments may be made to (a) the number of shares
    reserved under the 2007 Plan and (b) the number of shares
    and exercise price or strike price, if applicable, of all
    outstanding stock awards.
Effect on Stock
    Awards of Certain Corporate Transactions
In the event of the acquisition of the Company through the sale
    of substantially all of the Company's assets and the
    consequent discontinuance of its business or through a merger,
    consolidation, exchange, reorganization, reclassification,
    extraordinary dividend, divestiture, liquidation,
    recapitalization, stock split, stock dividend or otherwise,
    certain significant corporate transactions, our board of
    directors has the discretion to:
•
accelerate the vesting of a stock or performance award;
•
arrange for the lapse of any reacquisition or repurchase rights
    held by us with respect to the stock award;
•
cancel or arrange for the cancellation of the stock award, to
    the extent not vested or exercised prior to the effective time
    of the corporate transaction;
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•
provide for the surrender of a stock award in exchange for a
    payment equal to the excess of (a) the value of the
    property that the award holder would have received upon the
    exercise of the stock award over (b) the exercise price
    otherwise payable in connection with the stock award; or
•
arrange for the assumption, continuation or substitution of a
    stock award by a surviving or acquiring entity or parent company.
Retirement
    Plan and Other Benefits
We sponsor a SIMPLE IRA retirement plan, which covers
    substantially all qualified full-time employees. This plan
    provides that each employee may elect to contribute to an
    individual retirement plan through salary reduction
    contributions. We currently match each employee's
    contribution to the plan up to 3% of the employee's base
    annual wage. We also offer health, disability, and life
    insurance to our full-time employees.
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Certain
    Relationships and Related Party Transactions
The following is a summary of transactions since our inception
    to which we have been a party in which the amount involved
    exceeded $25,960, which is equal to 1% of the average of our
    total assets at December 31, 2008 and 2009, and in which
    any of our directors, executive officers or beneficial holders
    of more than 5% of our capital stock had or will have a direct
    or indirect material interest, other than compensation
    arrangements that are described under the section of this
    prospectus entitled "Compensation Discussion and
    Analysis."
Equity Issuances
    to Directors, Executive Officers and 5% Stockholders
The following table shows all issuances of common stock during
    the past two fiscal years to each of our directors, executive
    officers and holders of more than 5% of our capital stock.
Aggregate
Date of
Number of
Purchase
Issuance
Shares
Price
Directors and Executive Officers
Manny Villafaña
7/18/2007
5,400,000
$
90,000
Michael Winegar
7/18/2007
300,000
5,000
5% Stockholders
Kips Bay Investments, LLC
5/21/2008
60,000
350,000
7/21/2008
60,000
350,000
9/3/2008
60,000
350,000
10/15/2008
60,000
350,000
12/1/2008
60,000
350,000
1/12/2009
60,000
350,000
3/2/2009
4,800,000
3,000,000
3/2/2009
347,389
217,188
3/5/2009
60,000
350,000
4/17/2009
60,000
350,000
6/18/2009
120,000
700,000
6/30/2009
41,667
250,000
2/16/2010
600,000
3,500,000
2/16/2010
400,000
250,000
Agreements with
    Directors and Executive Officers
Please see "Executive Compensation" for information
    regarding the employment agreements with, and compensation of,
    our executive officers.
We have entered into indemnification agreements with our
    directors and executive officers. See
    "Management—Limitation of Directors' and
    Officers' Liability and Indemnification."
Agreements with
    5% Stockholders
Investment
    Agreement with Kips Bay Investments, LLC
On July 19, 2007, we executed an Investment Agreement and
    two secured convertible notes, each subject to a Loan and
    Security Agreement securing the repayment of such notes with all
    of our assets, with Kips Bay Investments, LLC, or KBI. Pursuant
    to the Investment Agreement, which was executed prior to KBI
    becoming a 5% or more beneficial holder of our common stock,
KBI
agreed to sell
    us all right and title to certain intellectual
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property assets for $100,000 in the form of a first secured
    convertible note, and to loan us $2.9 million in exchange
    for a second secured convertible note, or collectively the
    Notes. The Notes accrued interest at a rate of nine percent per
    annum, and were convertible into an aggregate of
    4,800,000 shares of our common stock for repayment of
    principal, representing a conversion price of $0.625 per share,
    and conversion of accrued interest also at $0.625 per share. The
    Investment Agreement also granted KBI two separate stock
    purchase options, each for the right to purchase up to
    600,000 shares of common stock for $3.5 million when
    we achieved defined milestones. The Investment Agreement also
    provides certain registration rights to KBI. See
    "Description of Capital Stock—Registration
    Rights."
In April 2008, we achieved our first defined milestone and KBI
    subsequently exercised its first stock purchase option under the
    Investment Agreement, purchasing 600,000 shares of our
    common stock for a purchase price of $3.5 million. On
    February 25, 2009, KBI elected to convert the entire amount
    of principal and $217,188 of the $467,188 in accrued interest on
    the Notes into 5,147,389 shares of our common stock which
    conversion occurred in March 2009. The remaining accrued
    interest of $250,000 was paid in cash concurrent with KBI's
    conversion election. In February 2010, KBI exercised its
    second stock purchase option under the Investment Agreement, the
    second milestone having previously been achieved by us,
    purchasing 600,000 shares of our common stock for a
    purchase price of $3.5 million. At that time we also agreed
    to convert the $250,000 of interest on the Notes previously paid
    in cash to common stock, and pursuant to this conversion, KBI
    repaid the $250,000 to us and we issued 400,000 shares of
    our common stock to KBI. The exercise of stock purchase options
    were made pursuant to a Stock Purchase Agreement between KBI and
    us, whereby each party agreed to indemnify the other for any
    breach of the agreement or violation of securities law, and
    whereby KBI made certain standard investment representations and
    warranties.
In connection with the execution of the Notes, we entered into a
    Loan and Security Agreement with KBI, whereby we granted a
    security interest in all of our existing and to-be-acquired
    property and proceeds therefrom, including all intellectual
    property assets transferred by KBI to us pursuant to the first
    secured convertible note. The Loan and Security Agreement
    terminated upon conversion of the Notes.
Due to the conversion of the Notes, exercise of the stock
    purchase options, and other purchases of our common stock, as of
    March 1, 2010, KBI beneficially owns 49.9% of our common
    stock.
Private
    Placements of Our Common Stock
In March 2009, we commenced a private offering of a minimum of
    500,000 shares of our common stock and up to a maximum of
    1,666,667 shares of our common stock to certain accredited
    investors at an offering price of $6.00 per share. We sold an
    aggregate of 516,241 shares of common stock in the private
    offering, which was completed in August 2009. KBI purchased
    41,667 shares of our common stock in this private offering.
Promoters and
    Certain Control Persons
We were incorporated in the State of Delaware in May 2007 and
    5,400,000 shares of common stock were issued to Manny
    Villafaña on July 17, 2007 for consideration of
    $90,000.
Mr. Villafaña may be deemed a promoter as defined in
    Rule 405 under the Securities Act of 1933, as amended.
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Principal
    Stockholders
The following table sets forth information regarding the
    beneficial ownership of our common stock as of March 1,
    2010 and as adjusted to reflect the sale of the common stock in
    this offering for:
•
each person, or group of affiliated persons, known by us to
    beneficially own more than 5% of our common stock;
•
each of our named executive officers;
•
each of our directors; and
•
all of our directors and executive officers as a group.
The percentage ownership information shown in the table is based
    upon 13,581,791 shares of common stock outstanding as of
    March 1, 2010, and the issuance
    of           shares
    of common stock in this offering. The percentage ownership
    information assumes no exercise of the underwriter's option
    to purchase additional shares.
Information with respect to beneficial ownership has been
    furnished by each director, officer or beneficial owner of more
    than 5% of our common stock. We have determined beneficial
    ownership in accordance with the rules of the SEC. These rules
    generally attribute beneficial ownership of securities to
    persons who possess sole or shared voting power or investment
    power with respect to those securities. In addition, the rules
    include shares of common stock issuable pursuant to the exercise
    of stock options that are either immediately exercisable or
    exercisable on or before April 30, 2010, which is
    60 days after March 1, 2010. These shares are deemed
    to be outstanding and beneficially owned by the person holding
    those options for the purpose of computing the percentage
    ownership of that person. Unless otherwise indicated, the
    persons or entities identified in this table have sole voting
    and investment power with respect to all shares shown as
    beneficially owned by them, subject to applicable community
    property laws.
Unless otherwise noted below, the address for each person or
    entity listed in the table is
c/o Kips
Bay Medical, Inc., 3405 Annapolis Lane North, Suite 200,
    Minneapolis, Minnesota 55447.
Beneficial Ownership
Options
Percentage of Shares
Number of Shares
Exercisable
Beneficially Owned
Held Before the
within 60
Before this
After this
Beneficial Owner
Offering
Days
Offering
Offering
5% Stockholders
Kips Bay Investments, LLC(1)
6,789,056
—
49.9
%
7803 Glenroy Road, Suite 300
Bloomington, Minnesota 55438
Directors and Named Executive Officers
Manny Villafaña
5,400,000
—
39.7
Michael Winegar
300,000
35,000
2.5
All directors and executive officers as a group (3 persons)
5,700,000
35,000
42.2
(1)
Voting and dispositive authority for the shares held of record
    by Kips Bay Investments, LLC are held by Nasser Kazeminy,
    members of his family, and certain trusts for the benefit of his
    children and grandchildren.
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Description of
    Capital Stock
Upon the closing of this offering, our authorized capital stock
    will consist of 40,000,000 shares of common stock, par
    value $0.01 per share, and 10,000,000 shares of
    undesignated stock, par value $0.01 per share.
The following summarizes important provisions of our common
    stock and describes certain material provisions of our
    certificate of incorporation and amended and restated bylaws.
    This summary is qualified by our certificate of incorporation
    and amended and restated bylaws, copies of which have been filed
    as exhibits to the registration statement of which this
    prospectus is a part, and by the provisions of applicable law.
Common
    Stock
Outstanding
    Shares
As of March 1, 2010, there were 13,581,791 shares of
    common stock outstanding held of record by 64 stockholders. All
    of our issued and outstanding shares of common stock are duly
    authorized, validly issued, fully paid and non-assessable. After
    giving effect to the sale of common stock offered in this
    offering, there will
    be           shares
    of common stock outstanding.
Dividend
    Rights
The holders of our outstanding shares of common stock are
    entitled to receive dividends, if any, as may be declared out of
    legally available funds at the times and the amounts as our
    board of directors may from time to time determine.
Voting
    Rights
Each holder of common stock is entitled to one vote for each
    share of common stock held on all matters submitted to a vote of
    the stockholders, including the election of directors. Our
    certificate of incorporation and amended and restated bylaws do
    not provide for cumulative voting rights. Because of this, the
    holders of a majority of the shares of common stock entitled to
    vote in any election of directors can elect all of the directors
    standing for election, if they should so choose.
No Preemptive
    or Similar Rights
The common stock is not entitled to preemptive rights and is not
    subject to conversion or redemption.
Right to
    Receive Liquidation Distributions
In the event of our liquidation, dissolution or winding up,
    holders of common stock will be entitled to share ratably in the
    net assets legally available for distribution to stockholders
    after the payment of all of our debts and other liabilities.
Undesignated
    Stock
Our board of directors has the authority, without first
    obtaining approval of our stockholders, to establish from the
    undesignated shares, one or more series of preferred stock and
    to fix the powers, preferences, rights and limitations of such
    class or series, including dividend rights, voting rights, and
    the right to receive liquidation distributions.
Options
As of March 1, 2010, we had outstanding options to purchase
    an aggregate of 783,000 shares of our common stock at a
    weighted average exercise price of $4.01 per share under our
    2007 Long-Term Incentive Plan. All outstanding options provide
    for adjustments in the event of a merger, consolidation,
    reorganization, recapitalization, stock dividend, stock split or
    other similar change in our corporate structure. As of
    March 1, 2010, 1,216,000 additional shares are
    reserved and available for issuance under our 2007 Long-Term
    Incentive Plan.
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Registration
    Rights
The Investment Agreement, dated July 19, 2007, between KBI
    and us provides that we will file a registration statement under
    the Securities Act of 1933, as amended, covering the re-sale of
    1,000,000 or more shares of our common stock within 90 days
    of a request by KBI. We are not obligated to take any
    registration-related actions during the following periods:
•
prior to the date that is six months following the effective
    date of our first registered public offering pursuant to a firm
    commitment underwritten offering;
•
during the period starting with the date that is 90 days
    prior to our good faith estimated date of filing of, and ending
    on the date three months immediately following the effective
    date of, any registration statement pertaining to our
    securities, provided certain conditions are met;
•
after we have effected two registrations of our securities for
    KBI, excluding registrations effected on
Form S-3
or any successor form, and such registrations have been declared
    effective; and
•
if we furnish to KBI a certificate stating that in the good
    faith judgment of the board of directors that it would be
    seriously detrimental to us or our stockholders for a
    registration statement to be filed in the near future, which
    certificate may only be used once in any
12-month
period, and which certificate may only defer our registration
    obligation for a maximum of 120 days.
Anti-Takeover
    Effects of Provisions of the Certificate of Incorporation and
    Amended and Restated Bylaws
Provisions of our certificate of incorporation and amended and
    restated bylaws may delay or discourage transactions involving
    an actual or potential change in our control or change in our
    management, including transactions in which stockholders might
    otherwise receive a premium for their shares, or transactions
    that our stockholders might otherwise deem to be in their best
    interests. Therefore, these provisions could adversely affect
    the price of our common stock. Among other things, our
    certificate of incorporation and amended and restated bylaws:
•
provide that all vacancies, including newly created
    directorships, may, except as otherwise required by law, be
    filled by the affirmative vote of a majority of directors then
    in office, even if less than a quorum;
•
require that any action to be taken by our stockholders must be
    effected at a duly called annual or special meeting of
    stockholders and not be taken by written consent;
•
provide that stockholders seeking to present proposals before a
    meeting of stockholders or to nominate candidates for election
    as directors at a meeting of stockholders must provide notice in
    writing in a timely manner, and also specify requirements as to
    the form and content of a stockholder's notice;
•
do not provide for cumulative voting rights (therefore allowing
    the holders of a majority of the shares of common stock entitled
    to vote in any election of directors to elect all of the
    directors standing for election, if they should so choose);
•
provide that special meetings of our stockholders may be called
    only by the Chairman of the Board, our Chief Executive Officer
    or by the board of directors pursuant to a resolution adopted by
    a majority of the total number of authorized directors; and
•
provide that stockholders will be permitted to amend our amended
    and restated bylaws only upon receiving at least
    66
2
/
3
%
    of the votes entitled to be cast by holders of all outstanding
    shares then entitled to vote generally in the election of
    directors, voting together as a single class.
The amendment of any of these provisions requires approval by
    the holders of at least
    66
2
/
3
%
    of our then outstanding common stock, voting as a single class.
Section 203
    of the General Corporation Law of the State of
    Delaware
We are subject to Section 203 of the Delaware General
    Corporation Law. Section 203 generally prohibits a public
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Delaware corporation from engaging in a "business
    combination" with an "interested stockholder" for
    a period of three years after the date of the transaction in
    which the person became an interested stockholder, unless:
•
prior to the date of the transaction, the board of directors of
    the corporation approved either the business combination or the
    transaction that resulted in the stockholder becoming an
    interested stockholder;
•
the interested stockholder owned at least 85% of the voting
    stock of the corporation outstanding at the time the transaction
    commenced, excluding for purposes of determining the number of
    shares outstanding (a) shares owned by persons who are
    directors and also officers and (b) shares owned by
    employee stock plans in which employee participants do not have
    the right to determine confidentially whether shares held
    subject to the plan will be tendered in a tender or exchange
    offer; or
•
on or subsequent to the date of the transaction, the business
    combination is approved by the board and authorized at an annual
    or special meeting of stockholders, and not by written consent,
    by the affirmative vote of at least
    66
2
/
3
%
    of the outstanding voting stock which is not owned by the
    interested stockholder.
Section 203 defines a business combination to include:
•
any merger or consolidation involving the corporation and the
    interested stockholder;
•
any sale, transfer, pledge or other disposition involving the
    interested stockholder of 10% or more of the assets of the
    corporation;
•
subject to exceptions, any transaction that results in the
    issuance or transfer by the corporation of any stock of the
    corporation to the interested stockholder; and
•
the receipt by the interested stockholder of the benefit of any
    loans, advances, guarantees, pledges or other financial benefits
    provided by or through the corporation.
In general, Section 203 defines an interested stockholder
    as any entity or person beneficially owning 15% or more of the
    outstanding voting stock of the corporation and any entity or
    person affiliated with or controlling or controlled by the
    entity or person.
Limitation on
    Liability of Directors and Indemnification
Our certificate of incorporation limits the liability of our
    directors to the fullest extent permitted by Delaware law.
    Delaware law provides that directors of a corporation will not
    be personally liable for monetary damages for breach of their
    fiduciary duties as directors, except for liability for any:
•
breach of their duty of loyalty to us or our stockholders;
•
act or omission not in good faith or that involves intentional
    misconduct or a knowing violation of law;
•
unlawful payment of dividends or redemption of shares as
    provided in Section 174 of the Delaware General Corporation
    Law; or
•
transaction from which the directors derived an improper
    personal benefit.
These limitations of liability do not apply to liabilities
    arising under federal securities laws and do not affect the
    availability of equitable remedies such as injunctive relief or
    rescission.
Our amended and restated bylaws provide that we will indemnify
    our directors and executive officers, and may indemnify other
    officers, employees and other agents, to the fullest extent
    permitted by law. Our amended and restated bylaws also permit us
    to secure insurance on behalf of any officer, director, employee
    or other agent for any liability arising out of his or her
    actions in connection with their services to us, regardless of
    whether our amended and restated bylaws permit indemnification.
    We have obtained a directors' and officers' liability
    insurance policy.
We have entered, and intend to continue to enter, into separate
    indemnification agreements with our directors and executive
    officers, in addition to the indemnification provided for in our
    certificate of incorporation and amended and restated bylaws.
    These agreements, among other things, require us to indemnify
    our directors and executive officers for certain expenses,
    including attorneys' fees, judgments, fines and settlement
    amounts incurred by a director or executive officer in any
    action or proceeding arising out of their services as one of our
    directors or
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executive officers, or any of our subsidiaries or any other
    company or enterprise to which the person provides services at
    our request.
At present, there is no pending litigation or proceeding
    involving any of our directors or executive officers as to which
    indemnification is required or permitted, and we are not aware
    of any threatened litigation or proceeding that may result in a
    claim for indemnification.
Insofar as indemnification for liabilities arising under the
    Securities Act of 1933, as amended, 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 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 and will be governed by the final
    adjudication of such issue.
Stock
    Exchange
We intend to apply for the listing of our common stock on the
    NASDAQ Global Market under the symbol "KIPS."
Transfer Agent
    and Registrar
The transfer agent and registrar for our common stock is Wells
    Fargo Shareowner Services.
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Shares Eligible
    For Future Sale
Prior to this offering, no public market existed for our common
    stock. Market sales of shares of our common stock after this
    offering and from time to time, and the availability of shares
    for future sale, may reduce the market price of our common
    stock. Sales of substantial amounts of our common stock, or the
    perception that these sales could occur, could adversely affect
    prevailing market prices for our common stock and could impair
    our future ability to obtain capital, especially through an
    offering of equity securities.
Based on the number of shares of common stock outstanding as
    of          ,
    2010, upon completion of this
    offering,          shares
    of common stock will be outstanding, assuming no exercise of the
    underwriter's option to purchase additional shares and no
    exercise of options prior to the completion of this offering.
    All of the shares sold in this offering will be freely tradable
    without restrictions or further registration under the
    Securities Act of 1933, as amended, unless held by our
    affiliates as that term is defined under Rule 144 under the
    Securities Act.
The
    remaining           shares
    of common stock outstanding upon the closing of this offering
    are restricted securities as defined under Rule 144 of the
    Securities Act. Restricted securities may be sold in the
    U.S. public market only if registered or if they qualify
    for an exemption from registration, including by reason of
    Rule 144 or 701 under the Securities Act, which rules are
    summarized below. These remaining shares will generally become
    available for sale in the public market as follows:
•
approximately          
    restricted shares will be eligible for sale in the public market
    upon completion of this offering under Rule 144;
•
approximately          
    restricted shares will be eligible for sale in the public market
    90 days after the date of this prospectus, subject to the
    volume, manner of sale and other limitations under Rule 144
    and Rule 701; and
•
approximately          
    restricted shares will be eligible for sale in the public market
    upon expiration of
lock-up
agreements 180 days after the date of this prospectus,
    which date may be extended in specified circumstances, subject
    in certain circumstances to the volume, manner of sale and other
    limitations under Rule 144 and Rule 701.
Additionally, of the 783,000 shares of common stock
    issuable upon exercise of options outstanding as of
    March 1, 2010,
    approximately           shares
    will be vested and eligible for sale 180 days after the
    date of this prospectus.
Rule 144
In general, under Rule 144 under the Securities Act, as in
    effect on the date of this prospectus, beginning 90 days
    after the date of this prospectus, a person who is not one of
    our affiliates at any time during the three months preceding a
    sale, and who has beneficially owned shares of our common stock
    to be sold for at least six months, would be entitled to sell an
    unlimited number of shares of our common stock, provided current
    public information about us is available. In addition, under
    Rule 144, a person who is not one of our affiliates at any
    time during the three months preceding a sale, and who has
    beneficially owned the shares of our common stock to be sold for
    at least one year, would be entitled to sell an unlimited number
    of shares immediately upon the closing of this offering without
    regard to whether current public information about us is
    available. Beginning 90 days after the date of this
    prospectus, our affiliates who have beneficially owned shares of
    our common stock for at least six months are 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 our common stock then
    outstanding, which will equal
    approximately          
    shares immediately after this offering; and
•
the average weekly trading volume of our common stock on The
    NASDAQ Global Market during the four calendar weeks preceding
    the filing of a notice on Form 144 with respect to the
    sale, or if no such notice is required, the date of receipt of
    the order to execute the sale.
Sales of restricted shares under Rule 144 by our affiliates
    are also subject to requirements regarding the manner of sale,
    notice and the availability of current public information about
    us. Rule 144 also provides that affiliates relying
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on Rule 144 to sell shares of our common stock that are not
    restricted shares must nonetheless comply with the same
    restrictions applicable to restricted shares, other than the
    holding period requirement.
Notwithstanding the availability of Rule 144, holders
    of          
    of our restricted shares have entered into
lock-up
agreements as described below under "Underwriting" and
    their restricted shares will become eligible for sale at the
    expiration of the restrictions set forth in those agreements,
    subject to any exceptions set forth therein or waivers by the
    underwriters.
Rule 701
Rule 701 under the Securities Act, as in effect on the date
    of this prospectus, permits resales of shares in reliance upon
    Rule 144 but without compliance with some of the
    restrictions of Rule 144, including the holding period
    requirement. Most of our employees, executive officers,
    directors or consultants who purchased shares under a written
    compensatory plan or contract, such as the shares issued under
    our 2007 Long-Term Incentive Plan, may be entitled to rely on
    the resale provisions of Rule 701, but all holders of
    Rule 701 shares are required to wait until
    90 days after the date of this prospectus before selling
    their shares under Rule 701. However, all of the
    Rule 701 shares are subject to
lock-up
agreements as described below and under "Underwriting"
    and will become eligible for sale at the expiration of the
    restrictions set forth in those agreements.
Lock-up
Agreements
We, along with our directors, executive officers and the holders
    of substantially all of our outstanding common stock and stock
    options, have agreed with the underwriters that for a period of
    180 days, subject to a possible extension under certain
    circumstances, following the date of this prospectus, we or they
    will not offer, sell, assign, transfer, pledge, contract to sell
    or otherwise dispose of or hedge any shares of our common stock
    or any securities convertible into or exchangeable for shares of
    common stock, subject to specified exceptions, without the prior
    written consent of Jefferies & Company, Inc. After the
180-day
lock-up
period, these shares may be sold, subject to applicable
    securities laws.
Registration
    Rights
KBI received certain registration rights in connection with the
    execution of the Investment Agreement dated July 19, 2007.
    See "Description of Capital Stock—Registration
    Rights."
Equity Incentive
    Plans
We intend to file registration statements under the Securities
    Act as promptly as possible after the effective date of this
    offering to register shares to be issued pursuant to our
    employee benefit plans. As a result, any options or rights
    exercised under our 2007 Long-Term Incentive Plan or any other
    benefit plan after the effectiveness of the registration
    statements will also be freely tradable in the public market,
    subject to the
lock-up
agreements discussed above. However, such shares held by
    affiliates will still be subject to the volume limitation,
    manner of sale, notice and public information requirements of
    Rule 144 and the
180-day
lock-up
arrangement described above, if applicable.
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Underwriting
Subject to the terms and conditions set forth in the
    underwriting agreement to be dated on or
    about          ,
    2010, between us and Jefferies & Company, Inc., as
    underwriter, we have agreed to sell to the underwriter and the
    underwriter has agreed to purchase from us, the entire number of
    shares of common stock offered by this prospectus.
The underwriting agreement provides that the obligations of
    Jefferies & Company, Inc. are subject to certain
    conditions precedent such as the receipt by
    Jefferies & Company, Inc. of officers'
    certificates and legal opinions and approval of certain legal
    matters by their counsel. The underwriting agreement provides
    that Jefferies & Company, Inc. will purchase all of
    the shares if any of them are purchased. We have agreed to
    indemnify Jefferies & Company, Inc. and certain of its
    controlling persons against certain liabilities, including
    liabilities under the Securities Act, and to contribute to
    payments that Jefferies & Company, Inc. may be
    required to make in respect of those liabilities.
Jefferies & Company, Inc. has advised us that it
    currently intends to make a market in the common stock. However,
    Jefferies & Company, Inc. is not obligated to do so
    and may discontinue any market-making activities at any time
    without notice. No assurance can be given as to the liquidity of
    the trading market for the common stock.
Jefferies & Company, Inc. is offering the common stock
    subject to its acceptance of the shares from us and subject to
    prior sale. Jefferies & Company, Inc. reserves the
    right to withdraw, cancel or modify offers to the public and to
    reject orders in whole or in part. In addition,
    Jefferies & Company, Inc. has advised us that it does
    not expect sales to accounts over which they have discretionary
    authority to exceed 5% of the common stock being offered.
Commission and
    Expenses
Jefferies & Company, Inc. has advised us that it
    proposes to offer the common stock to the public at the initial
    public offering price set forth on the cover page of this
    prospectus and to certain dealers at that price less a
    concession not in excess of $      per
    share of common stock. Jefferies & Company, Inc. may
    allow, and certain dealers may reallow, a discount from the
    concession not in excess of $      per
    share of common stock to certain brokers and dealers. After the
    offering, the initial public offering price, concession and
    reallowance to dealers may be reduced by Jefferies &
    Company, Inc. No such reduction will change the amount of
    proceeds to be received by us as set forth on the cover page of
    this prospectus.
The following table shows the public offering price, the
    underwriting discounts and commissions that we are to pay
    Jefferies & Company, Inc. and the proceeds, before
    expenses, to us in connection with this offering. Such amounts
    are shown assuming both no exercise and full exercise of
    Jefferies & Company, Inc.'s option to purchase
    additional shares.
Per Share
Total
Without
With
Without
With
Option to Purchase
Option to Purchase
Option to Purchase
Option to Purchase
Additional Shares
Additional Shares
Additional Shares
Additional Shares
Public offering price
$
$
$
$
Underwriting discounts and commissions paid by us
$
$
$
$
Proceeds to us, before expenses
$
$
$
$
We estimate expenses payable by us in connection with this
    offering, other than the underwriting discounts and commissions
    referred to above, will be approximately
    $      .
Determination of
    Offering Price
Prior to the offering, there has not been a public market for
    our common stock. Consequently, the initial public
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offering price for our common stock will be determined by
    negotiations between us and Jefferies & Company, Inc.
    Among the factors to be considered in these negotiations will be
    prevailing market conditions, our financial information, market
    valuations of other companies that we and Jefferies &
    Company, Inc. believe to be comparable to us, estimates of our
    business potential, the present state of our development and
    other factors deemed relevant.
We offer no assurances that the initial public offering price
    will correspond to the price at which the common stock will
    trade in the public market subsequent to the offering or that an
    active trading market for the common stock will develop and
    continue after the offering.
Listing
We intend to apply to have our common stock approved for listing
    on the Nasdaq Global Market under the trading symbol
    "KIPS."
Option to
    Purchase Additional Shares
We have granted to Jefferies & Company, Inc. an
    option, exercisable for 30 days from the date of this
    prospectus, to purchase up to an aggregate
    of          
    additional shares of common stock at the public offering price
    set forth on the cover page of this prospectus, less
    underwriting discounts and commissions. This option may be
    exercised only if Jefferies & Company, Inc. sells more
    shares than the total number set forth on the cover page of this
    prospectus.
No Sales of
    Similar Securities
We, our officers, directors and holders of all or substantially
    all our outstanding capital shares and other securities have
    agreed, subject to specified exceptions, not to directly or
    indirectly:
•
sell, offer, contract or grant any option to sell (including any
    short sale), pledge, transfer, establish an open "put
    equivalent position" within the meaning of
Rule 16a-l(h)
under the Securities Exchange Act of 1934, as amended, or
•
otherwise dispose of any common shares, options or warrants to
    acquire common shares, or securities exchangeable or exercisable
    for or convertible into common shares currently or hereafter
    owned either of record or beneficially, or
•
publicly announce an intention to do any of the foregoing for a
    period of 180 days after the date of this prospectus
    without the prior written consent of the underwriter.
This restriction terminates after the close of trading of the
    common shares on and including the 180 days after the date
    of this prospectus. However, subject to certain exceptions, in
    the event that either:
•
during the last 17 days of the
180-day
restricted period, we issue an earnings release or material news
    or a material event relating to us occurs, or
•
prior to the expiration of the
180-day
restricted period, we announce that we will release earnings
    results during the
16-day
period beginning on the last day of the
180-day
restricted period,
then in either case the expiration of the
180-day
restricted period will be extended until the expiration of the
18-day
period beginning on the date of the issuance of an earnings
    release or the occurrence of the material news or event, as
    applicable, unless Jefferies & Company, Inc. waives,
    in writing, such an extension.
Jefferies & Company, Inc. may, in its sole discretion
    and at any time or from time to time before the termination of
    the
180-day
period, without public notice, release all or any portion of the
    securities subject to
lock-up
agreements. There are no existing agreements between
    Jefferies & Company, Inc. and any of our shareholders
    who will execute a
lock-up
agreement, providing consent to the sale of shares prior to the
    expiration of the
lock-up
period.
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Stabilization
The underwriter has advised us that, pursuant to
    Regulation M under the Securities Exchange Act of 1934, as
    amended, certain persons participating in the offering may
    engage in transactions, including overallotment, stabilizing
    bids, syndicate covering transactions or the imposition of
    penalty bids, which may have the effect of stabilizing or
    maintaining the market price of the common stock at a level
    above that which might otherwise prevail in the open market.
    Overallotment involves syndicate sales in excess of the offering
    size, which creates a syndicate short position.
    "Covered" short sales are sales made in an amount not
    greater than the underwriter's option to purchase
    additional common shares in this offering. The underwriter may
    close out any covered short position by either exercising their
    option to purchase additional common shares or purchasing common
    shares in the open market. In determining the source of shares
    to close out the covered short position, the underwriter 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 option to purchase
    additional shares. "Naked" short sales are sales in
    excess of the option to purchase additional common shares. The
    underwriter must close out any naked short position by
    purchasing shares in the open market. A naked short position is
    more likely to be created if the underwriter is concerned that
    there may be downward pressure on the price of the common shares
    in the open market after pricing that could adversely affect
    investors who purchase in this offering. A stabilizing bid is a
    bid for the purchase of common stock on behalf of the
    underwriter for the purpose of fixing or maintaining the price
    of the common stock. A syndicate covering transaction is the bid
    for or the purchase of common stock on behalf of the underwriter
    to reduce a short position incurred by the underwriter in
    connection with the offering. A penalty bid is an arrangement
    permitting the underwriter to reclaim the selling concession
    otherwise accruing to a syndicate member in connection with the
    offering if the notes originally sold by such syndicate member
    are purchased in a syndicate covering transaction and therefore
    have not been effectively placed by such syndicate member.
    Neither we nor the underwriter makes 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. The underwriter is not obligated to engage in
    these activities and, if commenced, any of the activities may be
    discontinued at any time.
Electronic
    Distribution
A prospectus in electronic format may be made available by
e-mail
or on
    the web sites or through online services maintained by
    Jefferies & Company, Inc. or its affiliates. In those
    cases, prospective investors may view offering terms online and
    may be allowed to place orders online. Jefferies &
    Company, Inc. may agree with us to allocate a specific number of
    common stock for sale to online brokerage account holders. Any
    such allocation for online distributions will be made by
    Jefferies & Company on the same basis as other
    allocations. Other than the prospectus in electronic format, the
    information on Jefferies & Company, Inc.'s web
    site and any information contained in any other web site
    maintained by Jefferies & Company, Inc. is not part of
    this prospectus, has not been approved
and/or
endorsed by us or Jefferies & Company, Inc. and should
    not be relied upon by investors.
Affiliations
Jefferies & Company, Inc. or its affiliates from time
    to time may in the future provide investment banking, commercial
    lending and financial advisory services to us and our affiliates
    in the ordinary course of business. Jefferies &
    Company, Inc. and its affiliates, as applicable, will receive
    customary compensation and reimbursement of expenses in
    connection with such services.
European Economic
    Area
In relation to each Member State of the European Economic Area
    which has implemented the Prospectus Directive (as defined
    below) (each, a Relevant Member State), with effect from and
    including the date on which the Prospectus Directive is
    implemented in that Relevant Member State, or the Relevant
    Implementation Date, an offer of our common stock to the public
    may not be made in that Relevant Member State prior to the
    publication of a prospectus in relation to our common stock
    which has been approved by the competent authority in that
    Relevant Member State or, where appropriate, approved in another
    Relevant Member State and notified to the competent authority in
    that Relevant Member State, all in accordance with the
    Prospectus Directive, except that an
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offer to the public in that Relevant Member State of any shares
    of our common stock may be made at any time under the following
    exemptions under the Prospectus Directive if they have been
    implemented in the Relevant Member State:
(a) to legal entities which are authorized or regulated to
    operate in the financial markets or, if not so authorized or
    regulated, whose corporate purpose is solely to invest in
    securities;
(b) to any legal entity which has two or more of
    (1) an average of at least 250 employees during the
    last financial year; (2) a total balance sheet of more than
    €43,000,000 and (3) an annual net turnover of more
    than €50,000,000, as shown in its last annual or
    consolidated accounts;
(c) to fewer than 100 natural or legal persons per Relevant
    Member State (other than qualified investors as defined in the
    Prospectus Directive); or
(d) in any other circumstances falling within
    Article 3(2) of the Prospectus Directive,
provided that no such offer of our common stock shall result in
    a requirement for the publication by us or any underwriter of a
    prospectus pursuant to Article 3 of the Prospectus
    Directive.
For the purposes of this provision, the expression an
    "offer of our common stock to the public" in relation
    to any shares of our common stock in any Relevant Member State
    means the communication in any form and by any means of
    sufficient information on the terms of the offer and our common
    stock to be offered so as to enable an investor to decide to
    purchase or subscribe our common stock, as the same may be
    varied in that Member State by any measure implementing the
    Prospectus Directive in that Member State and the expression
    "Prospectus Directive" means Directive 2003/71/EC and
    includes any relevant implementing measure in each Relevant
    Member State.
United
    Kingdom
Shares of our common stock may not be offered or sold and will
    not be offered or sold to any persons in the United Kingdom
    other than to persons whose ordinary activities involve them in
    acquiring, holding, managing or disposing of investments (as
    principal or as agent) for the purposes of their businesses or
    otherwise in circumstances which have not resulted or will not
    result in an offer to the public in the United Kingdom within
    the meaning of the Financial Services and Markets Act 2000, or
    the FSMA.
In addition, any invitation or inducement to engage in
    investment activity (within the meaning of section 21 of
    the FSMA) in connection with the issue or sale of shares of our
    common stock may only be communicated or caused to be
    communicated in circumstances in which Section 21(1) of the
    FSMA does not apply to us. Without limitation to the other
    restrictions referred to herein, this prospectus is directed
    only at (1) persons outside the United Kingdom or
    (2) persons who:
(a) are qualified investors as defined in
    section 86(7) of FSMA, being persons falling within the
    meaning of article 2.1(e)(i), (ii) or (iii) of
    the Prospectus Directive; and
(b) are either persons who fall within article 19(1)
    of the Financial Services and Markets Act 2000 (Financial
    Promotion) Order 2005, as amended, or Order, or are persons who
    fall within article 49(2)(a) to (d) ("high net worth
    companies, unincorporated associations, etc.") of the
    Order; or
(c) to whom it may otherwise lawfully be communicated in
    circumstances in which Section 21(1) of the FSMA does not
    apply.
Without limitation to the other restrictions referred to herein,
    any investment or investment activity to which this offering
    circular relates is available only to, and will be engaged in
    only with, such persons, and persons within the United Kingdom
    who receive this communication (other than persons who fall
    within (2) above) should not rely or act upon this
    communication.
Germany
Any offer or solicitation of securities within Germany must be
    in full compliance with the German Securities
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Prospectus Act (Wertpapierprospektgesetz—WpPG). The offer
    and solicitation of securities to the public in Germany requires
    the publication of a prospectus that has to be filed with and
    approved by the German Federal Financial Services Supervisory
    Authority (Bundesanstalt für
    Finanzdienstleistungsaufsicht—BaFin). This prospectus has
    not been and will not be submitted for filing and approval to
    the BaFin and, consequently, will not be published. Therefore,
    this prospectus does not constitute a public offer under the
    German Securities Prospectus Act (Wertpapierprospektgesetz).
    This prospectus and any other document relating to our common
    stock, as well as any information contained therein, must
    therefore not be supplied to the public in Germany or used in
    connection with any offer for subscription of our common stock
    to the public in Germany, any public marketing of our common
    stock or any public solicitation for offers to subscribe for or
    otherwise acquire our common stock. This prospectus and other
    offering materials relating to the offer of our common stock are
    strictly confidential and may not be distributed to any person
    or entity other than the designated recipients hereof.
France
This prospectus has not been prepared in the context of a public
    offering of financial securities in France within the meaning of
Article L.411-1
of the French Code Monétaire et Financier and Title I
    of Book II of the Règlement Général of the
    Autorité des marchés financiers (the "AMF")
    and therefore has not been and will not be filed with the AMF
    for prior approval or submitted for clearance to the AMF.
    Consequently, the shares of our common stock may not be,
    directly or indirectly, offered or sold to the public in France
    and offers and sales of the shares of our common stock may only
    be made in France to qualified investors (investisseurs
    qualifiés) acting for their own, as defined in and in
    accordance with
Articles L.411-2
and D.411-1 to D.411-4, D.734-1, D.744-1, D.754-1 and D.764-1 of
    the French Code Monétaire et Financier. Neither this
    prospectus nor any other offering material may be released,
    issued or distributed to the public in France or used in
    connection with any offer for subscription on sale of the shares
    of our common stock to the public in France. The subsequent
    direct or indirect retransfer of the shares of our common stock
    to the public in France may only be made in compliance with
Articles L.411-1,
L.411-2, L.412-1 and L.621-8 through L.621-8-3 of the French
    Code Monétaire et Financier.
Sweden
This is not a prospectus under, and has not been prepared in
    accordance with the prospectus requirements provided for in, the
    Swedish Financial Instruments Trading Act [lagen (1991:980) om
    handel med finasiella instrument] nor any other Swedish
    enactment. Neither the Swedish Financial Supervisory Authority
    nor any other Swedish public body has examined, approved, or
    registered this document.
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Material United
    States Federal Tax Considerations
for
Non-U.S.
Holders of Common Stock
This section summarizes certain material U.S. federal
    income and estate tax considerations relating to the ownership
    and disposition of our common stock. This summary does not
    provide a complete analysis of all potential tax considerations.
    The information provided below is based on existing authorities.
    These authorities may change, possibly with retroactive effect,
    or the Internal Revenue Service, or IRS, might interpret the
    existing authorities differently. In either case, the tax
    considerations of owning or disposing of our common stock could
    differ from those described below. For purposes of this summary,
    a
"non-U.S. holder"
is any holder that is not, for U.S. federal income tax
    purposes, any of the following:
•
an individual citizen or resident of the United States;
•
a corporation organized under the laws of the United States or
    any state;
•
a trust that is (i) subject to the primary supervision of a
    U.S. court and the control of one or more U.S. persons
    or (ii) has a valid election in effect under applicable
    U.S. Treasury regulations to be treated as a
    U.S. person; or
•
an estate, the income of which is subject to U.S. federal
    income taxation regardless of source.
If a partnership or other flow-through entity is the owner of
    our common stock, the tax treatment of a partner in the
    partnership or an owner of the entity will depend upon the
    status of the partner or other owner and the activities of the
    partnership or other entity. Accordingly, partnerships and
    flow-through entities that hold our common stock and partners or
    owners of such partnerships or entities, as applicable, should
    consult their own tax advisors.
This summary is based upon provisions of the Internal Revenue
    Code of 1986, as amended, or the Code, and regulations, rulings
    and judicial decisions as of the date of this prospectus. Those
    authorities may be changed, perhaps retroactively, so as to
    result in U.S. federal income and estate tax consequences
    different from those summarized below. In addition, the summary
    does not represent a description of the U.S. federal income
    and estate tax consequences applicable to you if you are subject
    to special treatment under the U.S. federal income tax laws
    (including if you are a U.S. expatriate, "controlled
    foreign corporation," "passive foreign investment
    company," bank, insurance company or other financial
    institution, dealer or trader in securities, a person who holds
    our common stock as a position in a hedging transaction,
    straddle or conversion transaction, or other person subject to
    special tax treatment). We cannot assure you that a change in
    law will not alter significantly the tax considerations that we
    describe in this summary. Finally, this summary does not
    describe the effects of any applicable foreign, state, or local
    laws.
INVESTORS CONSIDERING THE PURCHASE OF OUR COMMON STOCK SHOULD
    CONSULT THEIR OWN TAX ADVISORS REGARDING THE APPLICATION OF THE
    U.S. FEDERAL INCOME AND ESTATE TAX LAWS TO THEIR PARTICULAR
    SITUATION AND THE CONSEQUENCES OF FOREIGN, STATE OR LOCAL LAWS
    AND TAX TREATIES.
Dividends
Any dividend paid to a
non-U.S. holder
in respect of our common stock generally will be subject to
    U.S. withholding tax at a 30% rate. The withholding tax
    might apply at a reduced rate under the terms of an applicable
    income tax treaty between the United States and the
non-U.S. holder's
country of residence. To obtain a reduced rate of withholding
    under a treaty, a
non-U.S. holder
must certify its entitlement to treaty benefits by providing a
    properly completed
Form W-8BEN
or other applicable form to us or our paying agent. If the
non-U.S. holder
holds the stock through a financial institution or other agent
    acting on the holder's behalf, the holder will be required
    to provide appropriate documentation to the agent. The
    holder's agent will then be required to provide
    certification to us or our paying agent, either directly or
    through other intermediaries. For payments made to a foreign
    partnership or other flow-through entity, the certification
    requirements generally apply to the partners or other owners
    rather than to the partnership or other entity, and the
    partnership or other entity must provide the partners' or
    other owners' documentation to us or our paying agent.
    Special rules, described
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below, apply if a dividend is effectively connected with a
    U.S. trade or business conducted by the
non-U.S. holder.
A
non-U.S. holder
eligible for a reduced rate of U.S. withholding tax
    pursuant to an income tax treaty generally may obtain a refund
    of any excess amounts withheld from the Internal Revenue Service
    by filing an appropriate claim for refund with the Internal
    Revenue Service.
Sale of Common
    Stock
Non-U.S. holders
generally will not be subject to U.S. federal income tax on
    any gains realized on the sale, exchange, or other disposition
    of our common stock. This general rule, however, is subject to
    several exceptions. For example, the gain would be subject to
    U.S. federal income tax if:
•
the gain is effectively connected with the conduct by the
non-U.S. holder
of a U.S. trade or business or, if a treaty applies, is
    attributable to a permanent establishment of the
non-U.S. holder
in the United States, in which case the special rules described
    below apply;
•
the
non-U.S. holder
is an individual who holds our common stock as a capital asset
    and who is present in the United States for 183 days or
    more in the taxable year of the sale, exchange, or other
    disposition, and certain other requirements are met; or
•
the rules of the Foreign Investment in Real Property Tax Act, or
    FIRPTA (described below), treat the gain as effectively
    connected with a U.S. trade or business.
A
non-U.S. holder
described in the first bullet point immediately above will be
    subject to tax on the net gain derived from the sale under
    regular graduated U.S. federal income tax rates, and if
    such
non-U.S. holder
is a corporation, it may also be subject to the branch profits
    tax generally equal to 30% of its effectively connected earnings
    and profits or at such lower rate as may be specified by an
    applicable income tax treaty. An individual
non-U.S. holder
described in the second bullet point immediately above will be
    subject to a flat 30% tax on the gain derived from the sale,
    which may be offset by United States source capital losses, even
    though the individual is not considered a resident of the United
    States.
The FIRPTA rules may apply to a sale, exchange or other
    disposition of our common stock if we are, or were within five
    years before the transaction, a "U.S. real property
    holding corporation," or USRPHC. In general, we would be a
    USRPHC if interests in U.S. real property comprised most of
    our assets. We do not believe that we are a USRPHC or that we
    will become one in the future. Even if we become a USRPHC, if
    our common stock is regularly traded on an established
    securities market, such common stock will be treated as United
    States real property interests only if the
non-U.S. holder
actually or constructively held more than five percent of such
    regularly traded common stock.
Dividends or Gain
    Effectively Connected With a U.S. Trade or Business
If any dividend on our common stock, or gain from the sale,
    exchange or other disposition of our common stock, is
    effectively connected with a U.S. trade or business
    conducted by the
non-U.S. holder,
then the dividend or gain will be subject to U.S. federal
    income tax at the regular graduated rates. If the
non-U.S. holder
is eligible for the benefits of a tax treaty between the United
    States and the holder's country of residence, any
    effectively connected dividend or gain would generally be
    subject to U.S. federal income tax only if it is also
    attributable to a permanent establishment or fixed base
    maintained by the holder in the United States. Payments of
    dividends that are effectively connected with a U.S. trade
    or business will not be subject to the 30% withholding tax if
    the holder claims exemption from withholding by providing a
    properly completed
Form W-8ECI.
If the
non-U.S. holder
is a corporation, that portion of its earnings and profits that
    is effectively connected with its U.S. trade or business
    would generally be subject to a "branch profits tax."
    The branch profits tax rate is generally 30%, although an
    applicable income tax treaty might provide for a lower rate.
U.S. Federal
    Estate Tax
The estates of nonresident alien individuals generally are
    subject to U.S. federal estate tax on property with a
    U.S. situs. Because we are a U.S. corporation, our
    common stock will be U.S. situs property and therefore will
    be included for U.S. estate tax purposes in the taxable
    estate of a nonresident alien decedent. The U.S. federal
    estate
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tax liability of the estate of a nonresident alien may be
    affected by a tax treaty between the United States and the
    decedent's country of residence. The test for whether an
    individual is a resident of the United States for federal estate
    tax purposes differs from the test used for federal income tax
    purposes.
Backup
    Withholding and Information Reporting
The Code and the Treasury regulations require those who make
    specified payments to report the payments to the IRS. Among the
    specified payments are dividends and proceeds paid by brokers to
    their customers. The required information returns enable the IRS
    to determine whether the recipient properly included the
    payments in income. This reporting regime is reinforced by
    "backup withholding" rules. These rules require the
    payors to withhold tax from payments subject to information
    reporting if the recipient fails to provide his taxpayer
    identification number to the payer, furnishes an incorrect
    identification number, or repeatedly fails to report interest or
    dividends on his returns. The withholding tax rate is currently
    28%. The backup withholding rules do not apply to payments to
    corporations, whether domestic or foreign.
Payments to
non-U.S. holders
of dividends on our common stock will generally not be subject
    to backup withholding, and payments of proceeds made to
non-U.S. holders
by a broker upon a sale of our common stock will not be subject
    to backup withholding, in each case so long as the
non-U.S. holder
certifies its nonresident status and the payer does not have
    actual knowledge or reason to know that such holder is a
    U.S. person as defined under the Code or such holder
    otherwise establishes an exemption. We must report annually to
    the IRS any dividends paid to each
non-U.S. holder
and the tax withheld, if any, with respect to such dividends.
    Copies of these reports may be made available to tax authorities
    in the country where the
non-U.S. holder
resides.
Any amounts withheld from a payment to a holder of our common
    stock under the backup withholding rules generally may be
    credited against any U.S. federal income tax liability of
    the holder.
New Legislation
    Relating to Foreign Accounts
Newly enacted legislation may impose withholding taxes on
    certain types of payments made to "foreign financial
    institutions" and certain other
non-U.S. entities.
Under this legislation, the failure to comply with additional
    certification, information reporting and other specified
    requirements could result in withholding tax being imposed on
    payments of dividends and sales proceeds to foreign
    intermediaries and certain
non-U.S. holders.
The legislation imposes a 30% withholding tax on dividends on,
    or gross proceeds from the sale or other disposition of, our
    common stock paid to a foreign financial institution or to a
    foreign non-financial entity, unless (i) the foreign
    financial institution undertakes certain diligence and reporting
    obligations or (ii) the foreign non-financial entity either
    certifies it does not have any substantial U.S. owners or
    furnishes identifying information regarding each substantial
    U.S. owner. If the payee is a foreign financial
    institution, it must enter into an agreement with the
    U.S. Treasury requiring, among other things, that it
    undertake to identify accounts held by certain U.S. persons
    or
U.S.-owned
foreign entities, annually report certain information about such
    accounts and withhold 30% on payments to account holders whose
    actions prevent it from complying with these reporting and other
    requirements. The legislation applies to payments made after
    December 31, 2012. Prospective investors should consult
    their tax advisors regarding this legislation.
THE PRECEDING DISCUSSION OF U.S. FEDERAL INCOME TAX
    CONSIDERATIONS IS FOR GENERAL INFORMATION ONLY. IT IS NOT TAX
    ADVICE. EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN TAX
    ADVISOR REGARDING THE PARTICULAR U.S. FEDERAL, STATE, LOCAL
    AND FOREIGN TAX CONSEQUENCES OF PURCHASING, HOLDING, AND
    DISPOSING OF OUR COMMON STOCK, INCLUDING THE CONSEQUENCES OF ANY
    PROPOSED CHANGE IN APPLICABLE LAWS.
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Legal
    Matters
The validity of the shares of common stock offered hereby and
    certain other legal matters will be passed upon for us by
    Fredrikson & Byron, P.A., Minneapolis, Minnesota. The
    underwriters have been represented in connection with this
    offering by Cooley Godward Kronish LLP, Palo Alto, California.
Experts
Ernst & Young LLP, independent registered public
    accounting firm, has audited our financial statements at
    December 31, 2008 and 2009, and for the period from
    May 1, 2007 (date of inception) to December 31, 2007,
    the years ended December 31, 2008 and 2009, and for the
    period from May 1, 2007 (date of inception) to
    December 31, 2009, as set forth in their report. We have
    included our financial statements in the prospectus and
    elsewhere in the registration statement in reliance on
    Ernst & Young LLP's report, given on their
    authority as experts in accounting and auditing.
Where You Can
    Find More Information
We have filed with the SEC a registration statement on
Form S-1
under the Securities Act with respect to the shares of common
    stock offered by this prospectus. This prospectus does not
    contain all of the information included in the registration
    statement, portions of which are omitted as permitted by the
    rules and regulations of the SEC. For further information
    pertaining to us and the common stock to be sold in this
    offering, you should refer to the registration statement and its
    exhibits. 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 filed as an
    exhibit to the registration statement or such other document,
    each such statement being qualified in all respects by such
    reference. On the closing of this offering, we will be subject
    to the informational requirements of the Securities Exchange Act
    and will be required to file annual, quarterly and current
    reports, proxy statements and other information with the SEC. We
    anticipate making these documents publicly available, free of
    charge, on our website at www.kipsbaymedical.com as soon as
    reasonably practicable after filing such documents with the SEC.
    The information contained in, or that can be accessed through,
    our website is not part of this prospectus.
You can read the registration statement and our future filings
    with the SEC over the Internet at the SEC's website at
    www.sec.gov. You may request copies of the filing, at no cost,
    by telephone at
(763) 235-3540
or by mail at Kips Bay Medical, Inc., 3405 Annapolis Lane North,
    Suite 200, Minneapolis, MN 55447. You may also read and
    copy any document we file with the SEC at its public reference
    facility at 100 F Street, N.E., Washington, D.C.
    20549. Copies of the registration statement may be obtained from
    the SEC at prescribed rates from the public reference room at
    such address. You may obtain information regarding the operation
    of the public reference room by calling
1-800-SEC-0330.
87
Index To
    Financial Statements
Page
Report of Independent Registered Public
    Accounting Firm
F-2
Statements of Operations
F-3
Balance Sheets
F-4
Statements of Stockholders' Equity
    (Deficit)
F-5
Statements of Cash Flows
F-6
Notes to the Financial Statements
F-7
F-1
Table of Contents
Report of
    Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Kips Bay Medical, Inc.
We have audited the accompanying balance sheets of Kips Bay
    Medical, Inc. (a development stage company) as of
    December 31, 2008 and 2009, and the related statements of
    operations, stockholders' equity (deficit), and cash flows
    for each of the three years in the period ended
    December 31, 2009, and for the period from May 1, 2007
    (inception) to December 31, 2009. 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. We were not engaged to perform an
    audit of the Company's internal control over financial
    reporting. Our audits included consideration of internal control
    over financial reporting as a basis for designing audit
    procedures that are appropriate in the circumstances, but not
    for the purpose of expressing an opinion on the effectiveness of
    the Company's internal control over financial reporting.
    Accordingly, we express no such opinion. An audit also includes
    examining, on a test basis, evidence supporting the amounts and
    disclosures in the financial statements, assessing the
    accounting principles used and significant estimates made by
    management and evaluating the overall financial statement
    presentation. We believe that our audits provide a reasonable
    basis for our opinion.
In our opinion, the financial statements referred to above
    present fairly, in all material respects, the financial position
    of Kips Bay Medical, Inc. at December 31, 2008 and 2009,
    and the results of its operations and its cash flows for each of
    the three years in the period ended December 31, 2009 and
    for the period from May 1, 2007 (inception) to
    December 31, 2009, in conformity with U.S. generally
    accepted accounting principles.
As discussed in Note 6 to the financial statements,
    effective January 1, 2009, the Company adopted the
    provisions of the Financial Accounting Standards Board's
    Accounting Standards Codification Topic
815-40
and
    changed its method of accounting for certain instruments indexed
    to the Company's own stock.
/s/  Ernst
    & Young, LLP
Minneapolis, Minnesota
April 8, 2010
F-2
Table of Contents
Kips Bay Medical,
    Inc.
(A Development Stage Company)
Statements of Operations
Period from
Period from
May 1, 2007
May 1, 2007
(Date of
(Date of
Inception) to
Inception) to
December 31,
Year Ended December 31,
December 31,
2007
2008
2009
2009
Operating expenses:
Research and development
$
196
$
2,635
$
3,004
$
5,835
Selling, general and administrative
381
754
779
1,914
Operating loss
(577
)
(3,389
)
(3,783
)
(7,749
)
Interest income
65
52
17
134
Interest expense
(164
)
(390
)
(181
)
(735
)
Impairment of available for sale securities
—
(85
)
—
(85
)
Change in fair value of investor stock purchase option
—
—
610
610
Net loss
$
(676
)
$
(3,812
)
$
(3,337
)
$
(7,825
)
Basic and diluted net loss per share
$
(0.16
)
$
(0.62
)
$
(0.30
)
Weighted average shares outstanding—basic and diluted
4,106,557
6,100,767
11,069,342
(In thousands, except share and per
    share amounts)
See accompanying notes to financial statements.
F-3
Table of Contents
Kips Bay Medical,
    Inc.
(A Development Stage Company)
Balance Sheets
December 31,
2008
2009
ASSETS
Current assets:
Cash and cash equivalents
$
943
$
2,469
Short-term investments
181
948
Prepaid expenses and other current assets
89
37
Total current assets
1,213
3,454
Property and equipment, net
239
286
Total assets
$
1,452
$
3,740
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
23
$
84
Accrued liabilities
159
184
Accrued interest payable
424
—
Investor stock purchase option liability
—
960
Total current liabilities
606
1,228
Long-term debt, net
2,862
—
Commitments and contingencies (note 5)
Stockholders' equity:
Undesignated stock, $0.01 par value, 10,000,000 shares
    authorized, no shares issued and outstanding as of
    December 31, 2008 and 2009, respectively
—
—
Common stock, $0.01 par value, 40,000,000 shares
    authorized, 6,300,000 and 12,398,919 issued and outstanding as
    of December 31, 2008 and 2009, respectively
63
124
Additional paid-in capital
2,409
11,556
Accumulated other comprehensive income
—
33
Deficit accumulated during development stage
(4,488
)
(9,201
)
Total stockholders' equity (deficit)
(2,016
)
2,512
Total liabilities and stockholders' equity
$
1,452
$
3,740
(In thousands except share and per
    share amounts)
See accompanying notes to financial statements.
F-4
Table of Contents
Kips Bay Medical,
    Inc.
(A Development Stage Company)
Statements of Stockholders'
    Equity (Deficit)
Period from May 1, 2007 (Date of Inception) to
    December 31, 2009,
and for the Years Ended December 31, 2007, 2008 and
    2009
Deficit
Accumulated
Accumulated
Additional
During the
Other
Total
Common Stock
Paid-In
Development
Comprehensive
Stockholders'
Shares
Amount
Capital
Stage
Income
Equity
Balance at May 1, 2007 (date of inception)
—
$
—
$
—
$
—
$
—
$
—
Comprehensive loss
Net loss
—
—
—
(676
)
—
(676
)
Unrealized loss on investments, net
—
—
—
—
(13
)
(13
)
Comprehensive loss
(689
)
Common stock issued to founders at incorporation, $0.167 per
    share
6,000,000
60
40
—
—
100
Issued stock purchase options in conjunction with issuance of
    secured convertible notes
194
194
Effect of beneficial conversion feature on secured convertible
    notes
74
74
Stock-based compensation expense
—
—
16
—
—
16
Balance at December 31, 2007
6,000,000
60
324
(676
)
(13
)
(305
)
Comprehensive loss
Net loss
—
—
—
(3,812
)
—
(3,812
)
Unrealized gain on investments, net
—
—
—
—
13
13
Comprehensive loss
(3,799
)
Common stock issued at $5.83 per share
300,000
3
1,747
—
—
1,750
Stock-based compensation expense
—
—
338
—
—
338
Balance at December 31, 2008
6,300,000
63
2,409
(4,488
)
—
(2,016
)
Comprehensive loss
Net loss
—
—
—
(3,337
)
—
(3,337
)
Unrealized gain on investments, net
—
—
—
—
33
33
Comprehensive loss
(3,304
)
Cumulative effect adjustment for adoption of FASB ASC
815-40
(194
)
(1,376
)
(1,570
)
Common stock issued at $5.83 per share
300,000
3
1,747
—
—
1,750
Common stock issued upon conversion of note payable, conversion
    price of $0.625
4,800,000
48
2,952
—
—
3,000
Common stock issued upon conversion of accumulated interest on
    note payable, conversion price of $0.625
347,389
4
213
—
—
217
Common stock issued, $1.00 per share, employee exercise of
    incentive stock option
1,000
—
1
—
—
1
Common stock issued, $6.00 per share, under private placement
    offering (net of issuance costs of $29)
516,241
5
3,063
—
—
3,068
Common stock issued, $7.00 per share, under private placement
    offering (net of issuance costs of $11)
134,289
1
928
—
—
929
Stock-based compensation expense
—
—
437
—
—
437
Balance at December 31, 2009
12,398,919
$
124
$
11,556
$
(9,201
)
$
33
$
2,512
(In thousands except share amounts)
See accompanying notes to financial statements.
F-5
Table of Contents
Kips Bay Medical,
    Inc.
(A Development Stage Company)
Statements of Cash Flows
Period from
Period from
May 1, 2007
May 1, 2007
(Date of
(Date of
Inception)
Inception)
to December 31,
Year Ended December 31,
to December 31,
2007
2008
2009
2009
Cash flows from operating activities:
Net loss
$
(676
)
$
(3,812
)
$
(3,337
)
$
(7,825
)
Adjustments to reconcile net loss to net cash used in operating
    activities:
Depreciation expense
9
49
60
118
Stock-based compensation
16
338
437
791
Amortization of discount on secured convertible notes
38
92
138
268
Impairment of available for sale securities
—
85
—
85
Change in fair value of investor stock purchase option
—
—
(610
)
(610
)
Changes in operating assets and liabilities:
Prepaid expenses and other current assets
(65
)
(24
)
52
(37
)
Accounts payable
17
7
60
84
Accrued liabilities
30
129
25
184
Accrued interest payable
126
298
(207
)
217
Net cash used in operating activities
(505
)
(2,838
)
(3,382
)
(6,725
)
Cash flows from investing activities:
Net change in short-term investments
(548
)
282
(734
)
(1,000
)
Purchase of property and equipment
(212
)
(86
)
(106
)
(404
)
Net cash provided by (used in) investing activities
(760
)
196
(840
)
(1,404
)
Cash flows from financing activities:
Proceeds from sale of common stock
100
—
—
100
Proceeds from issuances of notes payable
3,000
—
—
3,000
Proceeds from exercise of investor option to purchase common
    stock
—
1,750
1,750
3,500
Proceeds from sale of common stock under private placement
    offerings, net of issuance costs
—
—
3,997
3,997
Proceeds from exercise of employee stock options
—
—
1
1
Net cash provided by financing activities
3,100
1,750
5,748
10,598
Net increase (decrease) in cash and cash equivalents
1,835
(892
)
1,526
2,469
Cash and cash equivalents at beginning of period
—
1,835
943
—
Cash and cash equivalents at end of period
$
1,835
$
943
$
2,469
$
2,469
Supplemental disclosures:
Interest paid in cash
$
—
$
—
$
250
$
250
Supplemental non-cash disclosures:
Conversion of note payable into common stock
$
—
$
—
$
3,000
$
3,000
Accrued interest paid by conversion into common stock
$
—
$
—
$
217
$
217
(In thousands)
See accompanying notes to financial statements.
F-6
Table of Contents
Kips Bay Medical,
    Inc.
(A Development Stage Company)
Notes To Financial
    Statements
1.
Organization and
    Business
Kips Bay Medical, Inc. was incorporated in the state of Delaware
    on May 1, 2007. We are a medical device company focused on
    developing, manufacturing and commercializing our innovative
    external saphenous vein support technology, or eSVS MESH, for
    use in coronary artery bypass grafting, or CABG, surgery. Our
    eSVS MESH is a nitinol mesh sleeve that, when placed over a
    saphenous vein graft during CABG surgery, is designed to improve
    the structural characteristics and long-term performance of the
    vein graft. In CABG procedures, surgeons harvest blood vessels,
    including the internal mammary artery from the chest and the
    saphenous vein from the leg, and attach the harvested vessels to
    bypass, or provide blood flow around, blocked coronary arteries.
Our activities since inception have consisted principally of
    acquiring product and technology rights, raising capital,
    performing research and development and conducting preclinical
    and clinical trials. Accordingly, we are considered to be in the
    development stage as of December 31, 2009, as defined by
    the Financial Accounting Standard Board, or FASB, Accounting
    Standard Codification, or ASC, 915. At December 31, 2009,
    we had an accumulated deficit of $9.2 million and we expect
    to incur losses for the foreseeable future. To date, we have
    been funded by private equity and debt financings. Although we
    believe that we will be able to successfully fund our
    operations, there can be no assurance that we will be able to do
    so or that we will ever operate profitably.
2.
Summary of
    Significant Accounting Policies
Use of
    Estimates
The preparation of financial statements in conformity with
    accounting principles generally accepted in the United States of
    America requires management to make estimates and assumptions
    that affect the reported amounts and disclosures in the combined
    consolidated financial statements and accompanying notes. Actual
    results could differ from those estimates.
Cash and Cash
    Equivalents
Cash and cash equivalents consist of cash and money market funds
    with original maturities of three months or less. The carrying
    value of these instruments approximates fair value. We have not
    experienced any losses on our cash and cash equivalents.
Short-term
    Investments
Short-term investments consist of certificates of deposits and
    mutual fund investments with a maturity of greater than three
    months and less than one year. Short-term investments have been
    classified and accounted for as
available-for-sale
securities and are reported on the balance sheet at fair value
    with unrealized gains or losses reported as a component of other
    comprehensive income. We continually evaluate our investments in
    marketable securities for impairment due to declines in market
    value considered to be
other-than-temporary.
That evaluation includes persistent declining stock prices and
    general economic and company-specific evaluations.
Property and
    Equipment
Property and equipment is stated at cost less accumulated
    depreciation. Depreciation is computed based upon the estimated
    useful lives of the respective assets, or the lesser of the
    estimated useful life or the remaining life of the underlying
    facility lease for leasehold improvements, ranging from three to
    seven years, and is recorded using the straight-line method.
    Repairs and maintenance costs are expensed as incurred.
F-7
Table of Contents
Kips Bay Medical,
    Inc.
(A Development Stage Company)
Notes To Financial Statements—(Continued)
Impairment of
    Long-Lived Assets
In accordance with FASB ASC 360,
Property, Plant and
    Equipment
, long-lived assets, such as property and
    equipment, are reviewed for impairment whenever events or
    changes in circumstances indicate that the carrying amount of an
    asset may not be recoverable. Recoverability of assets to be
    held and used is measured by a comparison of the carrying amount
    of an asset to estimated undiscounted future cash flows expected
    to be generated by the asset. If the carrying amount of an asset
    exceeds its estimated future cash flows, then an impairment
    charge is recognized by the amount by which the carrying amount
    of the asset exceeds the fair value of the asset. As of
    December 31, 2008 and 2009, management believes that no
    modification of the remaining useful lives or write-down of
    long-lived assets is required.
Fair Value of
    Financial Instruments
We adopted the provisions of FASB ASC 820,
Fair Value
    Measurements and Disclosures
, effective January 1,
    2008. FASB ASC 820 defines fair value, establishes a framework
    for measuring fair value under generally accepted accounting
    principles, or GAAP, and enhances disclosures about fair value
    measurements.
Fair value is defined as the price that would be received to
    sell an asset or paid to transfer a liability in an orderly
    transaction between market participants at the measurement date.
    Valuation techniques used to measure fair value, as required by
    FASB ASC 820, must maximize the use of observable inputs and
    minimize the use of unobservable inputs.
The standard describes a fair value hierarchy based on three
    levels of inputs, of which the first two are considered
    observable and the last unobservable, that may be used to
    measure fair value. Our assessment of the significance of a
    particular input to the fair value measurements requires
    judgment, and may affect the valuation of the assets and
    liabilities being measured and their placement within the fair
    value hierarchy. The three levels of input are:
Level 1—Quoted prices in active markets for identical
    assets or liabilities.
Level 2—Inputs other than Level 1 that are
    observable, either directly or indirectly, such as quoted prices
    for similar assets or liabilities; quoted prices in markets that
    are not active; or other inputs that are observable or can be
    corroborated by observable market data for substantially the
    full term of the assets or liabilities.
Level 3—Unobservable inputs that are supported by
    little or no market activity and that are significant to the
    fair value of the assets or liabilities.
The adoption of this statement did not have a material impact on
    our results of operations and financial condition.
Following is a description of our valuation methodologies for
    assets and liabilities measured at fair value.
Where quoted prices are available in an active market, fair
    value is based upon quoted market prices and is classified in
    level 1 of the fair value hierarchy. If quoted market
    prices are not available, fair value is based upon observable
    inputs such as quoted prices for similar assets or liabilities,
    quoted prices in markets that are not active, or other inputs
    that are observable or can be corroborated by observable market
    data, and the assets or liabilities are classified in
    level 2 of the valuation hierarchy. When quoted prices and
    observable inputs are unavailable, fair values are based on
    internally developed cash flow models and are classified in
    level 3 of the valuation hierarchy. The internally
    developed cash flow models primarily use, as inputs, estimates
    for interest rates and discount rates, including yields of
    comparable traded instruments adjusted for illiquidity and other
    risk factors, amount of cash flows and expected holding periods
    of the assets. These inputs reflect our own assumptions about
    the assumptions market participants would use in pricing the
    assets, including assumptions about risk developed based on the
    best information available in the circumstances.
F-8
Table of Contents
Kips Bay Medical,
    Inc.
(A Development Stage Company)
Notes To Financial Statements—(Continued)
Other financial instruments, including accounts payable and
    accrued liabilities, are carried at cost, which we believe
    approximates fair value because of the short-term maturity of
    these instruments.
Research and
    Development Expenses
Research and development costs are expensed as incurred and
    include the costs to design, develop, test, deploy and enhance
    our eSVS MESH. It also includes costs related to the execution
    of clinical trials and to obtain regulatory approval for our
    eSVS MESH. We expense amounts paid to obtain patents or acquire
    licenses as the ultimate recoverability of the amounts paid is
    uncertain.
We charge research and development costs, including clinical
    trial costs, to expense when incurred, consistent with the
    guidance of FASB ASC 730,
Research and Development
.
    Clinical trial costs are a significant component of research and
    development expenses. All of our clinical trials are performed
    at clinical trial sites and are administered by contract
    research organizations, or CROs. Costs of setting up clinical
    trial sites are accrued immediately. Expenses related to
    clinical trials generally are accrued based on contracted
    amounts and the achievement of milestones, such as number of
    patients enrolled. We monitor levels of performance under each
    significant contract, including the extent of patient enrollment
    and other activities through communications with the CROs, and
    adjust the estimates, if required, on a quarterly basis so that
    clinical expenses reflect the actual effort expended by each CRO.
All material CRO contracts are terminable by us upon written
    notice and we are generally only liable for actual effort
    expended by the CROs and certain non-cancelable expenses
    incurred at any point of termination.
Comprehensive
    Income/Loss
Comprehensive income/loss consists of other comprehensive income
    or losses and net loss. Other comprehensive income or losses
    include certain changes in equity that are excluded from net
    loss. Specifically, we include unrealized gains and losses on
available-for-sale
securities in other comprehensive income/loss. Comprehensive
    loss for each period presented is set forth in the Statements of
    Stockholders' Equity (Deficit).
Income
    Taxes
Income taxes are accounted for under the asset and liability
    method. Deferred tax assets and liabilities are recognized for
    the future tax consequences attributable to differences between
    the financial statement carrying amounts of existing assets and
    liabilities and their respective tax bases and operating loss
    and tax credit carry-forwards. Deferred tax assets and
    liabilities are measured using enacted tax rates expected to
    apply to taxable income in the years in which those temporary
    differences are expected to be recovered or settled. The effect
    on deferred tax assets and liabilities of a change in tax rates
    is recognized in income in the period that includes the
    enactment date. In light of our cumulative losses, we believe
    that it is more likely than not that our net deferred tax asset
    will not be realized. Accordingly, a full valuation allowance
    has been recorded against our net deferred tax assets.
Stock-Based
    Compensation
Stock-based incentive awards are accounted for under the
    provisions of FASB ASC 718,
Compensation — Stock
    Compensation
, which requires companies to measure and
    recognize the cost of employee and non-employee services
    received in exchange for awards of equity instruments based on
    the grant date fair value of those awards. Compensation cost is
    recognized ratably using the straight-line attribution method
    over the expected vesting period, which is considered to be the
    requisite service period. In addition, we are required to
    estimate the amount of expected forfeitures when calculating the
    compensation costs, instead of accounting for forfeitures as
    incurred.
F-9
Table of Contents
Kips Bay Medical,
    Inc.
(A Development Stage Company)
Notes To Financial Statements—(Continued)
All of our options previously awarded were classified as equity
    instruments and continue to maintain their equity classification.
The fair value of options is estimated at the date of grant
    using the Black-Scholes option pricing model with the
    assumptions listed in note 7. Risk free interest rates are
    based upon U.S. Treasury rates appropriate for the expected
    term. Expected volatility and forfeiture rates are based on the
    volatility rates of a set of guideline companies, which consist
    of public and recently public medical technology companies. The
    assumed dividend yield is zero, as we do not expect to declare
    any dividends in the foreseeable future. The expected term is
    determined using the simplified method allowed by SEC Staff
    Accounting Bulletin No. 110. The fair value of the
    common stock underlying the stock options has been determined by
    our Board of Directors at each award grant date based upon a
    variety of factors, primarily the most recent purchase prices of
    our common stock issued to third parties in arms-length
    transactions, but also the progress of our product development,
    the progress of our preclinical and clinical testing, and the
    risks associated with our business plan.
Stock-based compensation expense in our statements of operations
    is summarized as follows:
Period from May 1,
Period from May 1,
2007 (Date of
2007 (Date of
Inception) to
December 31,
Inception) to
December 31, 2007
2008
2009
December 31, 2009
Research and development
$
14
$
298
$
390
$
702
Sales, general and administrative
2
40
47
89
Total stock-based compensation
$
16
$
338
$
437
$
791
(In thousands)
Net Loss Per
    Share
We compute net loss per share in accordance with FASB ASC 260,
Earnings Per Share
, under which basic net loss
    attributable to common stockholders, on a per share basis, is
    computed by dividing income available to common stockholders
    (the numerator) by the weighted-average number of common shares
    outstanding (the denominator) during the period. Shares issued
    during the period and shares reacquired during the period are
    weighted for the portion of the period that they were
    outstanding. The computation of diluted earnings per share, or
    EPS, is similar to the computation of basic EPS except that the
    denominator is increased to include the number of additional
    common shares that would have been outstanding if the dilutive
    potential common shares had been issued. In addition, in
    computing the dilutive effect of convertible securities, the
    numerator is adjusted to add back the after-tax amount of
    interest recognized in the period associated with any
    convertible debt. Diluted EPS is the same as basic EPS due to
    common equivalent shares being excluded from the calculation, as
    their effect is anti-dilutive.
The following table summarizes our calculation of net loss per
    common share:
Period from May 1,
2007 (Date of
Inception) to
December 31,
December 31, 2007
2008
2009
Net loss
$
(676
)
$
(3,812
)
$
(3,337
)
Weighted average shares outstanding—basic and diluted
4,106,557
6,100,767
11,069,342
Net loss per share—basic and diluted
$
(0.16
)
$
(0.62
)
$
(0.30
)
(In thousands, except per share
    amounts)
F-10
Table of Contents
Kips Bay Medical,
    Inc.
(A Development Stage Company)
Notes To Financial Statements—(Continued)
Outstanding potential common shares not included in diluted net
    loss per share attributable to common stockholders calculations
    included:
Period from May 1,
2007 (Date of
Inception) to
December 31,
December 31, 2007
2008
2009
Employee and non-employee stock options
295,000
531,750
598,000
Common shares issuable for conversion of debt (See note 6)
4,800,000
4,800,000
—
Common shares issuable under investor option purchase agreements
    (See note 6)
1,200,000
900,000
600,000
Fiscal
    Year
We operate on a manufacturing calendar with our fiscal year
    always ending on December 31. Each quarter is
    13 weeks, consisting of one five-week and two four-week
    periods.
New Accounting
    Pronouncements
In June 2009, the FASB issued FASB ASC 105,
Generally
    Accepted Accounting Principles
, which establishes the FASB
    Accounting Standards Codification as the sole source of
    authoritative generally accepted accounting principles. Pursuant
    to the provisions of FASB ASC 105, we have reflected references
    to GAAP in our financial statements issued for the period ended
    December 31, 2009. The adoption of FASB ASC 105 did not
    impact our financial position or results of operations.
In June 2008, the FASB issued FASB ASC
815-40,
Derivatives and Hedging
, which provides guidance on how
    to determine if certain instruments (or embedded features) are
    considered indexed to a company's own stock, including
    instruments similar to warrants to purchase the company's
    stock. FASB ASC
815-40
clarifies the determination of whether equity-linked instruments
    (or embedded features), such as our convertible notes or options
    to purchase our common stock, are considered indexed to our own
    stock, which would qualify as a scope exception and therefore be
    exempt from the application of FASB ASC 815. As a result of the
    adoption of the provisions of FASB ASC
815-40
on
    January 1, 2009, certain instruments previously reported as
    equity are now accounted for as derivative instruments. ASC
815-40
was
    initially applied by recording a cumulative effect adjustment to
    retained earnings upon adoption. The impact of adopting this
    guidance is described in note 6.
3.
Short-Term
    Investments and Impairment
Short-term investments include a mutual fund investment and
    certificates of deposit, which are generally measured using
    quoted prices in active markets and are classified as
    Level 1.
Due to the short maturities of our investments in certificates
    of deposits, their amortized cost approximates fair value.
As of December 31, 2008 we concluded that the value of our
    mutual fund investment was impaired and that this impairment was
    other than temporary. We recorded an other than temporary
    impairment charge of $85,000, which resulted in a new adjusted
    cost basis for this investment. We had no other unrealized gains
    or losses as of December 31, 2008. For the year ended
    December 31, 2009, unrealized gains of $33,000 were
    reported in other comprehensive income as the market value
    exceeded the cost of our mutual fund investment.
F-11
Table of Contents
Kips Bay Medical,
    Inc.
(A Development Stage Company)
Notes To Financial Statements—(Continued)
4.
Property and
    Equipment
At December 31, 2008 and 2009, property and equipment
    consist of the following:
December 31,
2008
2009
Furniture and fixtures
$
33
$
36
Machinery, equipment and tooling
154
254
Computers and software
62
66
Leasehold improvements
48
48
Accumulated depreciation
(58
)
(118
)
Property and equipment, net
$
239
$
286
(In thousands)
Depreciation expense for the years ended December 31, 2007,
    2008 and 2009 was $9,000, $49,000 and $60,000, respectively.
5.
Commitments and
    Contingencies
Leases
We entered into an operating lease agreement for our facility.
    The term of this lease runs from October 1, 2007 through
    September 30, 2010. The monthly base rent amount is fixed
    over the entire term of the lease. Terms of this lease
    arrangement include market rate renewal options, payment of
    executory costs such as real estate taxes, insurance and common
    area maintenance. We are currently in negotiations with our
    landlord to renew this lease. We also lease certain other office
    equipment under non-cancelable operating lease arrangements
    which are not recognized on our balance sheets.
Annual future minimum lease obligations under our operating
    lease agreements as of December 31, 2009 are as follows:
2010
$
46
2011
3
2012
3
Total
$
52
(In thousands)
Rent expense was $14,000, $57,000 and $57,000 for the years
    ended December 31, 2007, 2008 and 2009, respectively, and
    $128,000 for the period from May 1, 2007 (date of
    inception) to December 31, 2009.
Royalty
    Payments
The core intellectual property relating to our eSVS MESH,
    including five patent applications pending in the United States
    and nine patent applications pending in countries outside the
    United States, was acquired from Medtronic, Inc. pursuant to an
    Assignment and License Agreement dated October 9, 2007. As
    consideration for the assignment of such intellectual property,
    we have agreed to pay Medtronic an aggregate of up to
    $15.0 million upon the achievement of certain sales
    milestones and a royalty of 4% on sales of our eSVS MESH. The
    royalty will terminate upon the earlier of the expiration of all
    of the patents and patent applications, or when the aggregate
    royalties paid reaches $100.0 million.
F-12
Table of Contents
Kips Bay Medical,
    Inc.
(A Development Stage Company)
Notes To Financial Statements—(Continued)
Legal
    Proceedings
We are not currently engaged in any litigation.
Employment
    Agreements
We entered into an employment agreement with Manny
    Villafaña, our founder, Chief Executive Officer and sole
    director, on July 19, 2007, which provides for a base
    salary and discretionary bonuses as determined by our Board of
    Directors. Mr. Villafaña is also entitled to
    participate in any employee benefit plans we sponsor. If we
    terminate Mr. Villafaña's employment without
    cause, he is entitled to his base salary for the entire term of
    the employment agreement, which expires on July 1, 2012.
Mr. Villafaña's employment agreement contains
    usual and customary provisions relating to confidential
    information and assignment of inventions to us. In addition, the
    agreement contains certain provisions concerning
    Mr. Villafaña's post-employment activities.
    Pursuant to the agreement, he has agreed not to compete with us
    for a period of two years after the termination of his
    employment. Such two-year period will automatically be extended
    by one year increments, up to a total of five years, unless
    terminated by us. As consideration for this non-competition
    provision, we will make a monthly payment to
    Mr. Villafaña equal to one twelfth of his base salary
    at the time of termination, adjusted to the Consumer Price
    Index, or CPI, beginning with the first month after termination
    of employment and continuing until the non-competition provision
    expires. Mr. Villafaña will also be entitled to
    continue his participation in our medical benefits plan for the
    term of the non-competition provision, provided he continues to
    pay the employee portion of the premium. Following the
    termination of his employment with us, Mr. Villafaña
    has also agreed to consult on non-confidential matters at the
    request of our Board of Directors.
We also entered into a change in control agreement with
    Mr. Villafaña on September 12, 2008. Under the
    terms of this agreement, if, within 24 months of a change
    in control, Mr. Villafaña's employment is
    terminated by us other than for cause, or if he resigns for good
    reason, Mr. Villafaña will be entitled to a prorated
    portion of any annual incentive bonus for the fiscal year in
    which the termination occurs and a severance benefit equal to
    three years of his base salary. The change in control agreement
    will expire on September 12, 2011, but will be
    automatically extended by one-year increments thereafter unless
    either party provides written notice to the other of the intent
    not to extend the agreement.
We have entered into employment agreements with certain key
    employees providing for an annual salary and such benefits in
    the future as may be approved by the Board of Directors. We have
    also entered into change of control agreements with employees
    which provide that if the employee is terminated for a reason
    other than cause, or resigns for good reason, upon a merger,
    acquisition, sale of substantially all of our assets, or
    liquidation, the employee will receive severance payments equal
    to his or her monthly salary for 12 to 36 months.
Indemnification
    Agreements
The Company, as permitted under Delaware law and in accordance
    with its Bylaws, indemnifies its officers and directors for
    certain events or occurrences, subject to certain limits, while
    the officer or director is or was serving at the Company's
    request in such capacity. The term of the indemnification period
    is for the officer's or director's lifetime. The
    Company may terminate the indemnification agreements with its
    officers and directors upon 90 days written notice, but
    termination will not affect claims for indemnification relating
    to events occurring prior to the effective date of termination.
    The maximum amount of potential future indemnification is
    unlimited; however, the Company has a director and officer
    insurance policy that limits its exposure and may enable it to
    recover a portion of any future amounts paid. The Company
    believes the fair value of these indemnification agreements is
    minimal. Accordingly, the Company has not recorded any
    liabilities for these agreements as of December 31, 2009.
F-13
Table of Contents
Kips Bay Medical,
    Inc.
(A Development Stage Company)
Notes To Financial Statements—(Continued)
6.
Convertible
    Promissory Notes and Equity Financing
Investment
    Agreement with Kips Bay Investments, LLC
On July 19, 2007, we executed an Investment Agreement under
    which we issued two secured convertible notes to Kips Bay
    Investments, LLC, or KBI. Pursuant to the Investment Agreement,
    which was executed prior to KBI becoming a 5% or more beneficial
    holder of our common stock, KBI agreed to sell us all right and
    title to certain intellectual property assets for the sum of
    $100,000 in the form of a first secured convertible note, and to
    loan us the sum of $2.9 million in exchange for a second
    secured convertible note, or collectively, the Notes. The Notes
    accrued interest at a rate of nine percent per annum, and were
    convertible into an aggregate of 4,800,000 shares of our
    common stock for repayment of principal, representing a
    conversion price of $0.625 per share, and conversion of accrued
    interest also at $0.625 per share. Pursuant to the Investment
    Agreement, we also granted KBI two separate options to purchase
    common stock, each for the right to purchase up to
    600,000 shares of our common stock for the sum of
    $3.5 million at such time as we have achieved certain
    defined milestones. The Investment Agreement also provides
    certain registration rights to KBI. The relative fair value of
    the stock purchase options and the beneficial conversion feature
    on the Notes were recorded as discounts on the Notes and were
    amortized over the term of the Notes using the effective
    interest method.
In connection with the execution of the Notes, we entered into a
    Loan and Security Agreement with KBI, whereby we granted a
    security interest in all of our existing and to-be-acquired
    property and proceeds therefrom, including all intellectual
    property assets transferred by KBI to us pursuant to the first
    secured convertible note. The Loan and Security Agreement
    terminated upon conversion of the Notes.
In April 2008, we achieved the first defined milestone and KBI
    subsequently exercised its first stock purchase option under the
    Investment Agreement, purchasing 600,000 shares of our
    common stock for a purchase price of $3.5 million.
In February 2009, KBI elected to convert the entire amount of
    principal and $217,000 of $467,000 of accrued interest on the
    Notes into our common stock, and we subsequently issued
    5,147,389 shares of our common stock to KBI. The remaining
    accrued interest of $250,000 was paid in cash concurrent with
    KBI's conversion election.
We account for derivative instruments in accordance with FASB
    ASC 815,
Derivatives and Hedging
, which provides
    accounting and reporting standards for derivative instruments,
    including certain derivative instruments embedded in other
    contracts. We do not use derivative instruments for hedging of
    market risks or for trading or speculative purposes. Effective
    January 1, 2009, we were required to adopt FASB ASC
815-40,
(formerly EITF Issue
No. 07-5,
Determining Whether an Instrument (or Embedded Feature) is
    Indexed to an Entity's Own Stock
), which clarified the
    determination of whether equity-linked instruments (or embedded
    features), such as the options to purchase our common stock
    granted to KBI, are considered indexed to our own stock, which
    would qualify as a scope exception under FASB ASC 815. As a
    result of adopting FASB ASC
815-40,
the
    second option to purchase our common stock granted to KBI is
    considered a derivative liability and must be measured at fair
    value. As noted above, the first option was exercised in 2008
    and was not outstanding at the effective date for FASB ASC
815-40.
The estimated fair value of our investor stock purchase option
    liability is recorded as a current liability on our balance
    sheets. Changes in the estimated fair values of this liability
    are recorded in our statements of operations.
On January 1, 2009, the date of adoption, we estimated the
    fair value of the second option to be $1.6 million and this
    amount was recorded as a cumulative effect adjustment on
    January 1, 2009, which increased our deficit accumulated
    during development stage by $1.4 million. The effect of
    marking this liability to "market" at
    December 31, 2009 resulted in a net decrease in the
    estimated fair values of this liability of $610,000, resulting
    in an estimated fair value of this liability of $960,000.
F-14
Table of Contents
Kips Bay Medical,
    Inc.
(A Development Stage Company)
Notes To Financial Statements—(Continued)
In February 2010, KBI exercised its second stock purchase option
    under the Investment Agreement, the second milestone having
    previously been achieved by us, purchasing 600,000 shares
    of our common stock for a purchase price of $3.5 million.
    At that time we also agreed to convert the $250,000 of interest
    on the Notes previously paid in cash to common stock, and
    pursuant to such conversion, KBI repaid the $250,000 to us and
    we subsequently issued 400,000 shares of our common stock
    to KBI. The exercise of this stock purchase option was made
    pursuant to a Stock Purchase Agreement between KBI and us.
Common Stock
    Offerings
In March 2009, we commenced a private offering of a minimum of
    500,000 shares of our common stock and up to a maximum of
    1,666,667 shares of our common stock to certain accredited
    investors at an offering price of $6.00 per share. We sold an
    aggregate of 516,241 shares of common stock in the private
    offering, which was completed in August 2009. KBI purchased
    41,667 shares of our common stock in this private offering.
In October 2009, we commenced a private offering of
    714,286 shares of our common stock to certain accredited
    investors at an offering price of $7.00 per share. As of
    December 31, 2009, we had sold an aggregate of
    134,289 shares of common stock in the private offering.
    Subsequent to December 31, 2009, we sold an additional
    182,872 shares of common stock for an aggregate total of
    317,161 shares. This offering was completed in
    February 2010.
7.
Stock-Based
    Compensation
2007 Long-Term
    Incentive Plan
Our 2007 Long-Term Incentive Plan, or the Plan, was adopted by
    the Board of Directors in July 2007. The Plan permits the
    granting of incentive and non-statutory stock options,
    restricted stock, stock appreciation rights, performance units,
    performance shares and other stock awards to eligible employee,
    directors and consultants. We grant options to purchase shares
    of common stock under the Plan at no less than the fair market
    value of the underlying common stock as of the date of grant.
    Options granted under the Plan have a maximum term of ten years
    and generally vest over four years at the rate of 25% of total
    shares underlying the option. Under the Plan, a total of
    2,000,000 shares of common stock were initially reserved
    for issuance.
A summary of option activity is as follows:
Weighted
Shares Under
Average
Available
Option
Exercise Price
For Grant
Options outstanding at May 1, 2007 (date of inception)
—
$
—
2,000,000
Granted
295,000
1.00
(295,000
)
Options outstanding at December 31, 2007
295,000
1.00
1,705,000
Granted
253,000
4.65
(253,000
)
Exercised
—
—
—
Cancelled
(16,250
)
2.21
16,250
Options outstanding at December 31, 2008
531,750
1.72
1,468,250
Granted
70,000
5.93
(70,000
)
Exercised
(1,000
)
1.00
—
Cancelled
(2,750
)
1.00
2,750
Options outstanding at December 31, 2009
598,000
3.08
1,401,000
F-15
Table of Contents
Kips Bay Medical,
    Inc.
(A Development Stage Company)
Notes To Financial Statements—(Continued)
The grant date total fair value of employee options vested
    during the years ended December 31, 2007, 2008 and 2009 was
    $0, $27,000 and $67,000, respectively. The total intrinsic value
    of options exercised during the years ended December 31,
    2007, 2008 and 2009 was $0, $0 and $5,000, respectively. Total
    proceeds received for options exercised during years ended
    December 31, 2008 and 2009 was $0 and $1,000, respectively.
Information about stock options outstanding, vested and expected
    to vest as of December 31, 2009, is as follows:
Outstanding, Vested and Expected to Vest
Options Vested
Weighted
Average
Remaining
Contractual
Weighted
Per Share
Life
Average
Options
Exercise Price
Shares
(Years)
Exercise Price
Exercisable
$
1.00
334,000
7.80
$
1.00
166,000
2.00
10,000
8.19
2.00
2,500
5.83
214,000
8.81
5.83
84,750
6.00
40,000
9.68
6.00
—
598,000
8.30
2.63
253,250
Stock-Based
    Compensation Expense
Total employee stock-based compensation expense recognized under
    FASB ASC 718 was as follows:
Period from May 1,
Period from May 1,
2007 (Date of
2007 (Date of
Inception) to
December 31,
Inception) to
December 31, 2007
2008
2009
December 31, 2009
Research and development
$
5
$
37
$
83
$
125
Selling, general and administrative
2
9
12
23
Total stock-based compensation
$
7
$
46
$
95
$
148
(In thousands)
As of December 31, 2007, 2008 and 2009, total compensation
    expense related to unvested employee stock options not yet
    recognized was $86,000, $199,000 and $297,000, respectively,
    which is expected to be allocated to expenses over a
    weighted-average period of 3.68, 2.88 and 2.22 years,
    respectively.
The assumptions used in the Black-Scholes option-pricing model
    for the years ended December 31, 2007, 2008 and 2009, and
    for the period from May 1, 2007 (Date of Inception) to
    December 31, 2009, are as follows:
Period from May 1,
Period from May 1,
2007
2007
(Date of Inception) to
(Date of Inception) to
December 31,
December 31,
December 31,
2007
2008
2009
2009
Risk free interest rate
3.39-4.32
%
2.66-3.58
%
1.75-2.80
%
1.75-4.32
%
Dividend yield
0
%
0
%
0
%
0
%
Expected volatility
52
%
53
%
48
%
48-53
%
Expected term
5.75-6.25 years
5.75-6.25 years
6.25 years
5.75-6.25 years
Weighted average grant date fair value
$
0.55
$
2.42
$
2.91
$
1.58
F-16
Table of Contents
Kips Bay Medical,
    Inc.
(A Development Stage Company)
Notes To Financial Statements—(Continued)
Nonemployee
    Stock-Based Compensation
We account for stock options granted to nonemployees as required
    by FASB ASC 718. In connection with stock options granted to
    nonemployees we recorded $8,000, $292,000 and $342,000 for
    nonemployee stock-based compensation during the years ended
    December 31, 2007, 2008 and 2009, respectively, and
    $642,000 for nonemployee stock-based compensation for the period
    from May 1, 2007 (Date of Inception) to December 31,
    2009. These amounts were based upon the fair value of the vested
    portion of the grants.
Amounts expensed during the remaining vesting period will be
    determined based on the fair value at the time of vesting.
8.
Employee Benefit
    Plan
We maintain a simplified employee retirement plan, or SEP, which
    commenced on January 1, 2008. The SEP is a defined
    contribution plan; employee contributions are voluntary and are
    determined on an individual basis, limited by the maximum
    amounts allowable under federal tax regulations. We contribute
    up to 3% of each individual's base salary as required under
    the safe-harbor provisions of Internal Revenue Service rules
    governing SEP plans. Our contributions vest immediately and are
    expensed when paid. We have recorded contributions of $33,000
    and $38,000 for the years ended December 31, 2008 and 2009,
    respectively, and $71,000 for the period from May 1, 2007
    (Date of Inception) to December 31, 2009.
9.
Income
    Taxes
We have incurred net operating losses since inception. We have
    not reflected any benefit of such net operating loss
    carryforwards in the accompanying financial statements and have
    established a full valuation allowance against our deferred tax
    assets.
Deferred income taxes reflect the net tax effects of
    (a) temporary differences between the carrying amounts of
    assets and liabilities for financial reporting purposes and the
    amounts used for income tax purposes, and (b) operating
    losses and tax credit carryforwards.
F-17
Table of Contents
Kips Bay Medical,
    Inc.
(A Development Stage Company)
Notes To Financial Statements—(Continued)
The significant components of our deferred tax assets for the
    years ended December 31, 2008 and 2009 are as follows:
December 31,
2008
2009
Deferred tax assets:
Net operating loss carryforwards
$
1,438
$
2,838
Intangible assets—license agreement
62
89
Stock-based compensation
134
283
Short term investment impairment
37
37
Research credit carryforwards
200
408
Other
61
51
Total deferred tax assets
1,932
3,706
Deferred tax liabilities:
—
—
Total deferred taxes
1,932
3,706
Valuation allowance
(1,932
)
(3,706
)
Net deferred tax asset
$
—
$
—
(In thousands)
A reconciliation of the statutory tax rates and the effective
    tax rates for the years ended December 31, 2007, 2008 and
    2009 is as follows:
Period from
Period from
May 1, 2007
May 1, 2007
(Date of Inception)
(Date of Inception)
to December 31,
Year Ended December 31,
to December 31,
2007
2008
2009
2009
Statutory rate
34.0
%
34.0
%
34.0
%
34.0
%
Permanent differences
(7.2
)
(3.3
)
(1.4
)
(2.7
)
State and local income taxes
7.7
8.9
9.4
9.0
Credits and other
1.8
5.0
5.5
5.0
Valuation allowance
(36.3
)
(44.6
)
(47.5
)
(45.3
)
0.0
%
0.0
%
0.0
%
0.0
%
Realization of the future tax benefits is dependent on our
    ability to generate sufficient taxable income within the
    carryforward period. Because of our history of operating losses,
    management believes that the deferred tax assets arising from
    the above-mentioned future tax benefits are currently not likely
    to be realized and, accordingly, we have provided a full
    valuation allowance. The net valuation allowance increased by
    $1.7 million and $1.8 million for the years ended
    December 31, 2008 and 2009, respectively, and
    $3.7 million for the period from May 1, 2007 (Date of
    Inception) to December 31, 2009.
Net operating losses and tax credit carryforwards as of
    December 31, 2009, are as follows:
Amount
Expiration Years
Net operating losses—federal
$
6,481
Beginning 2027
Tax credits—federal
$
396
Beginning 2027
(In thousands)
F-18
Table of Contents
Kips Bay Medical,
    Inc.
(A Development Stage Company)
Notes To Financial Statements—(Continued)
Utilization of the net operating loss carryforwards and credits
    may be subject to a substantial annual limitation due to the
    ownership change limitations provided by the Internal Revenue
    Code of 1986, as amended, or the IRC, and similar state
    provisions. We have not performed a detailed analysis to
    determine whether an ownership change under Section 382 of
    the IRC has occurred. The effect of an ownership change would be
    the imposition of an annual limitation on the use of net
    operating loss carryforwards attributable to periods before the
    change.
We would classify interest and penalties related to uncertain
    tax positions in income tax expense, if applicable. There was no
    interest expense or penalties related to unrecognized tax
    benefits recorded through December 31, 2009. The tax years
    2007 through 2009 remain open to examination by federal and
    state tax authorities.
10.
Subsequent
    Event
As discussed in note 6 above, in October 2009, we commenced
    a private offering of 714,286 shares of our common stock to
    certain accredited investors at an offering price of $7.00 per
    share. Subsequent to December 31, 2009, we sold an
    additional 182,872 shares of common stock, raising gross
    proceeds of $1.3 million. This offering was completed in
    February 2010.
Also as discussed in note 6 above, in February 2010, KBI
    exercised its second stock purchase option under the Investment
    Agreement. At that time we also agreed to convert the interest
    on the Notes previously paid in cash to common stock. In
    conjunction with this transaction we issued
    1,000,000 shares of our common stock in exchange for gross
    proceeds of $3.8 million.
F-19
Table of Contents
Shares
Kips
    Bay Medical, Inc.
Common
    Stock
Prospectus
Jefferies &
    Company
,
    2010
Table of Contents
Part II
Information Not
    Required In Prospectus
Item 13.
Other Expenses
    of Issuance and Distribution.
The following table sets forth the costs and expenses, other
    than the underwriting discounts and commissions, payable by us
    in connection with the sale of common stock being registered.
    All amounts shown are estimates, except the SEC registration
    fee, the Financial Industry Regulatory Authority, or FINRA,
    filing fee and the NASDAQ Global Market listing fee.
Amount
SEC registration fee
$
4,100
FINRA filing fee
6,250
NASDAQ Global Market listing fee
*
Blue sky fees and expenses
*
Legal fees and expenses
*
Accounting fees and expenses
*
Printing expenses
*
Transfer agent and registrar fees and expenses
*
Miscellaneous
*
Total
$
*
*
To be filed by amendment.
Item 14.
Indemnification
    of Directors and Officers.
Section 145 of the Delaware General Corporation Law
    provides that a corporation may indemnify any person made a
    party to an action by reason of the fact that he or she was a
    director, executive officer, employee or agent of the
    corporation or is or was serving at the request of the
    corporation against expenses (including attorneys' fees),
    judgments, fines and amounts paid in settlement actually and
    reasonably incurred by him or her in connection with such action
    if he or she acted in good faith and in a manner he or she
    reasonably believed to be in, or not opposed to, the best
    interests of the corporation and, with respect to any criminal
    action or proceeding, had no reasonable cause to believe his or
    her conduct was unlawful, except that, in the case of an action
    by or in right of the corporation, no indemnification may
    generally be made in respect of any claim as to which such
    person is adjudged to be liable to the corporation.
Our certificate of incorporation and amended and restated bylaws
    limit the liability of our directors to the fullest extent
    permitted by Delaware law. Delaware law provides that directors
    of a corporation will not be personally liable for monetary
    damages for breach of their fiduciary duties as directors,
    except for liability for any:
•
breach of their duty of loyalty to us or our stockholders;
•
act or omission not in good faith or that involves intentional
    misconduct or a knowing violation of law;
•
unlawful payment of dividends or redemption of shares as
    provided in Section 174 of the Delaware General Corporation Law;
    or
•
transaction from which the directors derived an improper
    personal benefit.
These limitations of liability do not apply to liabilities
    arising under federal securities laws and do not affect the
    availability of equitable remedies such as injunctive relief or
    rescission. Our amended and restated bylaws, which will become
    effective upon the closing of this offering, provide that we
    will indemnify our directors and executive officers, and may
    indemnify other officers, employees and other agents, to the
    fullest extent permitted by law.
As permitted by the Delaware General Corporation Law, we have
    entered into indemnification agreements with each of our
    directors and executive officers that require us to indemnify
    such persons against expenses, judgments,
II-1
Table of Contents
penalties, fines, settlements and other amounts actually and
    reasonably incurred, including expenses of a derivative action,
    in connection with an actual or threatened proceeding if any of
    them may be made a party because he or she is or was one of our
    directors. We will be obligated to pay these amounts only if the
    director acted in good faith and in a manner that he or she
    reasonably believed to be in or not opposed to our best
    interests. With respect to any criminal proceeding, we will be
    obligated to pay these amounts only if the director had no
    reasonable cause to believe his or her conduct was unlawful. The
    indemnification agreements also set forth certain procedures
    that will apply in the event of a claim for indemnification.
The underwriting agreement (Exhibit 1.1 hereto) provides
    for indemnification by the underwriters of us and our executive
    officers and directors, and by us of the underwriters for
    certain liabilities, including liabilities arising under the
    Securities Act, in connection with matters specifically provided
    in writing by the underwriters for inclusion in the registration
    statement.
Section 145(g) of the Delaware General Corporation Law
    permits a corporation to purchase and maintain insurance on
    behalf of any person who is or was a director, officer,
    employee, or agent of the corporation arising out of his or her
    actions in connection with their services to us, regardless of
    whether our amended and restated bylaws permit indemnification.
    We have purchased and intend to maintain insurance on behalf of
    any person who is or was a director or officer against any loss
    arising from any claim asserted against him or her and incurred
    by him or her in any such capacity, subject to certain
    exclusions.
Item 15.
Recent Sales
    of Unregistered Securities.
Since our inception in May 2007, we have issued and sold the
    following unregistered securities:
1. In July 2007, we issued an aggregate of
    5,700,000 shares of our common stock to our officers and
    director at a per share price of $0.0167 per share for aggregate
    consideration of $95,000.
2. We have granted stock options to purchase an aggregate
    of 803,000 shares of our common stock at exercise prices
    ranging from $1.00 to $7.00 per share through a total of 43
    grants to executive officers, employees, director and
    consultants pursuant to our 2007 Long-Term Incentive Plan.
3. We have issued and sold an aggregate of
    1,000 shares of our common stock to an employee, at a price
    of $1.00 per share pursuant to exercises of options granted
    under our 2007 Long Term Incentive Plan.
4. In April 2008, KBI exercised its option to purchase
    shares in connection with the Investment Agreement and related
    convertible promissory notes entered into with KBI in July 2007.
    Between May 2008 and June 2009, we issued an aggregate
    of 600,000 shares of our common stock to KBI for aggregate
    consideration of $3.5 million in satisfaction of this
    exercise.
5. In March 2009, we issued an aggregate of
    5,147,389 shares of our common stock to KBI for aggregate
    consideration of $3.2 million in connection with the
    Investment Agreement and related convertible promissory notes
    entered into with KBI in July 2007.
6. In February 2010, we issued 1,000,000 shares of our
    common stock to KBI for aggregate consideration of
    $3.8 million.
7. During March through August 2009, we issued and sold in
    a series of closings, an aggregate of 516,241 shares of our
    common stock at a per share price of $6.00, for aggregate
    consideration of $3.1 million in a private placement
    offering.
8. During October 2009 through February 2010, we issued and
    sold an aggregate of 317,161 shares of our common stock in
    at a per share price of $7.00, for aggregate consideration of
    $2.2 million in a private placement offering.
The offers, sales and issuances of the securities described in
    1-3 above were deemed to be exempt from registration under the
    Securities Act under either (i) Rule 701 promulgated
    under the Securities Act as offers and sale of securities
    pursuant to certain compensatory benefit plans and contracts
    relating to compensation in compliance with Rule 701 or
    (ii) Section 4(2) of the Securities Act as
    transactions by an issuer not involving any public offering. The
    recipients of securities in each of these transactions
    represented their intention to acquire the
II-2
Table of Contents
securities for investment only and not with view to or for sale
    in connection with any distribution thereof and appropriate
    legends were affixed to the share certificates and instruments
    issued in such transactions. All recipients had adequate access,
    through their relationships with us, to information about us.
The offers, sales, and issuances of the securities described in
    4-8 above were deemed to be exempt from registration under the
    Securities Act in reliance on Section 4(2) of the
    Securities Act and Regulation D promulgated thereunder as
    transactions by an issuer not involving a public offering. The
    recipients of securities in each of these transactions acquired
    the securities for investment only and not with a view to or for
    sale in connection with any distribution thereof and appropriate
    legends were affixed to the securities issued in these
    transactions. Each of the recipients of securities in these
    transactions was an accredited or sophisticated person and had
    adequate access, through employment, business or other
    relationships, to information about us.
Item 16.
Exhibits and
    Financial Statement Schedules.
(a) Exhibits.
Exhibit Index
Exhibit
Number
Description of Exhibit
1
.1*
Form of Underwriting Agreement.
3
.1
Certificate of Incorporation of the Registrant.
3
.2
Amended and Restated Bylaws of the Registrant.
4
.1*
Form of Common Stock Certificate.
5
.1*
Opinion of Fredrikson & Byron, P.A., counsel to the
    Registrant, with respect to the legality of securities being
    registered.
Lease Agreements
10
.1
Lease Agreement by and between the Registrant and St.  Paul
    Properties, Inc., as assigned to St.  Paul Fire and Marine
    Insurance Company, dated as of July 26, 2007.
Loan and Financing Agreements
10
.2
Investment Agreement by and between the Registrant and Kips Bay
    Investments, LLC, dated as of July 19, 2007.
10
.3
Loan and Security Agreement by and between the Registrant and
    Kips Bay Investments, LLC, dated as of June 19, 2007.
10
.4
First Secured Convertible Promissory Note executed by the
    Registrant in favor of Kips Bay Investments, LLC, dated as of
    June 19, 2007.
10
.5
Second Secured Convertible Promissory Note executed by the
    Registrant in favor of Kips Bay Investments, LLC, dated as of
    June 19, 2007.
10
.6
Agreement by and between the Registrant and Kips Bay
    Investments, LLC, dated as of February 12, 2010.
10
.7
Debt Conversion Agreement by and between the Registrant and Kips
    Bay Investments, LLC, dated as of February 12, 2010.
Agreements with Respect to Collaborations, Licenses, Research
    and Development
10
.8+
Assignment and License Agreement by and between the Registrant
    and Medtronic, Inc., dated as of October 9, 2007.
10
.9
Assignment by Medtronic, Inc. to the Registrant, dated as of
    August 26, 2008.
10
.10
Trademark Transfer Agreement by Medtronic, Inc. to the
    Registrant, dated as of October 10, 2007.
Agreements with Executive Officers
10
.11@
Employment Agreement by and between the Registrant and Manuel A.
    Villafaña, dated as of July 19, 2007.
10
.12@
Employment Agreement by and between the Registrant and Michael
    Winegar, dated as of September 1, 2007.
10
.13@
Employment Agreement by and between the Registrant and Scott
    Kellen, dated as of February 8, 2010.
II-3
Table of Contents
Exhibit
Number
Description of Exhibit
10
.14@*
Form of Indemnification Agreement between the Registrant and its
    Directors and Executive Officers.
10
.15@
Change in Control Agreement by and between the Registrant and
    Manuel A. Villafaña, dated as of September 12, 2008.
10
.16@
Change in Control Agreement by and between the Registrant and
    Michael Winegar, dated as of September 12, 2008.
10
.17@
Change in Control Agreement by and between the Registrant and
    Scott Kellen, dated as of February 8, 2010.
Equity Compensation Plans
10
.18@
2007 Long-Term Incentive Plan.
10
.19@
Form of Incentive Stock Option Agreement under the 2007
    Long-Term Incentive Plan.
10
.20@
Form of Non-Qualified Stock Option Agreement under the 2007
    Long-Term Incentive Plan.
10
.21@
Form of Restricted Stock Agreement under the 2007 Long-Term
    Incentive Plan.
21
Subsidiaries of the Registrant - None.
23
.1
Consent of Ernst & Young LLP.
23
.2*
Consent of Fredrikson & Byron, P.A.  (see Exhibit 5.1).
24
.1
Powers of Attorney (see signature page to initial filing).
99
.1
Consent of Michael Winegar
99
.2
Consent of Arch C. Smith
99
.3
Consent of Robert E. Munzenrider
99
.4
Consent of Robert J. Sheehy
*
To be filed by amendment.
+
Confidential treatment will be requested for portions of this
    exhibit.
@
Denotes management compensation plan or contract.
(b) Financial Statement Schedules.
All schedules are omitted as the required information is
    inapplicable or the information is presented in the financial
    statements or related notes.
Schedule II. Valuation and Qualifying Accounts
All other schedules are omitted as the required information is
    inapplicable or the information is presented in the financial
    statements or related notes.
Item 17.
Undertakings.
The undersigned registrant hereby undertakes to provide to the
    underwriters at the closing specified in the underwriting
    agreement, certificates in such denominations and registered in
    such names as required by the underwriters to permit prompt
    delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
    Securities Act 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 and is 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 and will be governed by the final
    adjudication of such issue.
II-4
Table of Contents
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
    Securities Act, 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)(1) 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, each post-effective amendment that contains a
    form of prospectus shall be deemed to be a new registration
    statement relating to the securities offered, and the offering
    of these securities at that time shall be deemed to be the
    initial bona fide offering.
II-5
Table of Contents
Signatures
Pursuant to the requirements of the Securities Act of 1933, as
    amended, the registrant has duly caused this registration
    statement on
Form S-1
to be signed on its behalf by the undersigned, thereunto duly
    authorized, in the City of Minneapolis, State of Minnesota on
    this 8th day of April, 2010.
Kips Bay Medical, Inc.
By:
/s/  Manny
    Villafaña
Manny Villafaña
Chairman of the Board and Chief
Executive Officer
Power Of
    Attorney
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
    signature appears below hereby constitutes and appoints Manny
    Villafaña and Scott Kellen, and each of them acting
    individually, as his true and lawful attorneys-in-fact and
    agents, with full power of each to act alone, with full powers
    of substitution and resubstitution, for him and in his name,
    place and stead, in any and all capacities, to sign the
    Registration Statement filed herewith and any and all amendments
    to said Registration Statement (including post-effective
    amendments and any related registration statements thereto filed
    pursuant to Rule 462 and otherwise), and file the same,
    with all exhibits thereto, and other documents in connection
    therewith, with the Securities and Exchange Commission, granting
    unto said attorneys-in-fact and agents, with full power of each
    to act alone, full power and authority to do and perform each
    and every act and thing requisite and necessary to be done in
    connection therewith, as fully for all intents and purposes as
    he might or could do in person, hereby ratifying and confirming
    all that said attorneys-in-fact and agents, or his or their
    substitutes, may lawfully do or cause to be done by virtue
    hereof.
Pursuant to the requirements of the Securities Act of 1933, this
    registration statement has been signed by the following persons
    in the capacities and on the dates indicated.
Signature
Title
Date
/s/  Manny
    Villafaña
Manny
    Villafaña
Chairman of the Board, Chief Executive Officer, and Director
(principal executive officer)
April 8, 2010
/s/  Scott
    Kellen
Scott
    Kellen
Chief Financial Officer and
Vice President of Finance
(principal financial officer and principal accounting officer)
April 8, 2010
II-6
Table of Contents
Kips Bay Medical,
    Inc.
Registration Statement On
Form S-1
Exhibit Index
Exhibit
Number
Description of Exhibit
1
.1*
Form of Underwriting Agreement.
3
.1
Certificate of Incorporation of the Registrant.
3
.2
Amended and Restated Bylaws of the Registrant.
4
.1*
Form of Common Stock Certificate.
5
.1*
Opinion of Fredrikson & Byron, P.A., counsel to the
    Registrant, with respect to the legality of securities being
    registered.
Lease Agreements
10
.1
Lease Agreement by and between the Registrant and St.  Paul
    Properties, Inc., as assigned to St.  Paul Fire and Marine
    Insurance Company, dated as of July 26, 2007.
Loan and Financing Agreements
10
.2
Investment Agreement by and between the Registrant and Kips Bay
    Investments, LLC, dated as of July 19, 2007.
10
.3
Loan and Security Agreement by and between the Registrant and
    Kips Bay Investments, LLC, dated as of June 19, 2007.
10
.4
First Secured Convertible Promissory Note executed by the
    Registrant in favor of Kips Bay Investments, LLC, dated as of
    June 19, 2007.
10
.5
Second Secured Convertible Promissory Note executed by the
    Registrant in favor of Kips Bay Investments, LLC, dated as of
    June 19, 2007.
10
.6
Agreement by and between the Registrant and Kips Bay
    Investments, LLC, dated as of February 12, 2010.
10
.7
Debt Conversion Agreement by and between the Registrant and Kips
    Bay Investments, LLC, dated as of February 12, 2010.
Agreements with Respect to Collaborations, Licenses, Research
    and Development
10
.8+
Assignment and License Agreement by and between the Registrant
    and Medtronic, Inc., dated as of October 9, 2007.
10
.9
Assignment by Medtronic, Inc. to the Registrant, dated as of
    August 26, 2008.
10
.10
Trademark Transfer Agreement by Medtronic, Inc. to the
    Registrant, dated as of October 10, 2007.
Agreements with Executive Officers
10
.11@
Employment Agreement by and between the Registrant and Manuel A.
    Villafaña, dated as of July 19, 2007.
10
.12@
Employment Agreement by and between the Registrant and Michael
    Winegar, dated as of September 1, 2007.
10
.13@
Employment Agreement by and between the Registrant and Scott
    Kellen, dated as of February 8, 2010.
10
.14@*
Form of Indemnification Agreement between the Registrant and its
    Directors and Executive Officers.
10
.15@
Change in Control Agreement by and between the Registrant and
    Manuel A. Villafaña, dated as of September 12, 2008.
10
.16@
Change in Control Agreement by and between the Registrant and
    Michael Winegar, dated as of September 12, 2008.
10
.17@
Change in Control Agreement by and between the Registrant and
    Scott Kellen, dated as of February 8, 2010.
Equity Compensation Plans
10
.18@
2007 Long-Term Incentive Plan.
10
.19@
Form of Incentive Stock Option Agreement under the 2007
    Long-Term Incentive Plan.
10
.20@
Form of Non-Qualified Stock Option Agreement under the 2007
    Long-Term Incentive Plan.
Table of Contents
Exhibit
Number
Description of Exhibit
10
.21@
Form of Restricted Stock Agreement under the 2007 Long-Term
    Incentive Plan.
21
Subsidiaries of the Registrant - None.
23
.1
Consent of Ernst & Young LLP.
23
.2*
Consent of Fredrikson & Byron, P.A.  (see Exhibit 5.1).
24
.1
Powers of Attorney (see signature page to initial filing).
99
.1
Consent of Michael Winegar
99
.2
Consent of Arch C. Smith
99
.3
Consent of Robert E. Munzenrider
99
.4
Consent of Robert J. Sheehy
*
To be filed by amendment.
+
Confidential treatment will be requested for portions of this
    exhibit.
@
Denotes management compensation plan or contract.