KIPS BAY MEDICAL, INC. (KIPS) SPO

We estimate that our net proceeds from the sale of the common stock offered 
pursuant to this prospectus will be approximately $13.3 million, or 
approximately $15.3 million if the underwriters exercise in full their option 
to purchase additional shares, assuming a public offering price of $1.48 per 
share, the closing price of the Company's common stock on October 15, 2012, 
and after deducting the underwriting discount and the estimated offering 
expenses that are payable by us. 

We intend to use the net proceeds from this offering primarily for the 
following purposes: 

• approximately $2.0 to 3.0 million to fund the process of seeking regulatory 
approval to market our eSVS Mesh in the United States and abroad, including 
human clinical trials; 

• approximately $1.0 to 2.0 million to fund the development and testing of 
additional applications of 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 expected use of net proceeds from this offering represents our current 
intentions based upon our present plans and business conditions; however, 
there may be circumstances where a reallocation of funds is necessary. The 
amount and timing of our actual expenditures depend on numerous factors, 
including the costs of seeking regulatory approval in the United States 
and abroad and the costs of developing and testing additional applications 
of our eSVS Mesh. The costs and timing of the development, particularly 
conducting clinical studies and trials, regulatory approval and 
commercialization of medical devices are highly uncertain, are subject to 
substantial risks and can often change. Accordingly, we may change the 
allocation of use of these proceeds as a result of contingencies such as 
the progress and results of our clinical studies and trials and other 
development and commercialization activities, manufacturing requirements 
and regulatory or competitive developments. A portion of the net proceeds 
may be used to acquire or invest in complementary businesses, 
technologies, services or products in the event we identify opportunities 
for such acquisitions or investments that we believe are in the best 
interests of our stockholders. 

We have no current plans, agreements or commitments with respect to any of 
the foregoing acquisitions or investments, and we are not currently engaged 
in any negotiations with respect to any such transaction. 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.

The development and commercialization of medical devices to treat 
cardiovascular disease is a highly competitive industry. 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 health of the patient and the 
stage of the disease. If physicians or their patients choose alternative 
treatments to CABG surgery due to the disadvantages of CABG surgery, such 
as the failure rate of CABG surgery, or if additional alternative treatments 
for cardiovascular disease are developed, there may be a decrease in the 
number of CABG surgery procedures. The American College of Cardiology/American 
Heart Association treatment guidelines state that CABG is the only 
recommended revascularization procedure for those patients with CAD in their 
left main coronary artery or CAD in three or more coronary arteries. 

Our eSVS Mesh is designed to improve the structural characteristics and 
long-term performance of vein grafts in CABG surgery. If our eSVS Mesh is 
proven to do so successfully, we believe physicians may more frequently 
choose to perform CABG surgery over alternative treatments. We expect the 
primary competition for our eSVS Mesh to be other products or techniques to 
improve the effectiveness of vein grafts in CABG surgery. 

We are aware of three companies that have developed mesh devices to be used 
on the outside of blood vessels. Vascular Graft Solutions, ("VGS"), an 
Israeli company, is developing a product called the Fluent expandable 
external support system which is designed to reduce vein graft failures in 
CABG surgery. VGS is currently conducting its first in-human trial in the 
United Kingdom. According to information filed on ClinicalTrials.gov, VGS 
expects to enroll approximately 30 patients and complete data collection 
for their primary outcome measure in June 2012. Alpha Research, a Swiss 
company, has developed a product known as the Biocompound Graft for use in 
coronary and peripheral bypass operations. The product is a stainless steel 
braided mesh, indicated for use in coronary or peripheral bypass with 
patients who have irregularly shaped veins. B. Braun, a German company, 
has developed a product known as ProVena for use in peripheral bypass 
operations. The product is a woven polymer mesh, indicated for use in 
peripheral artery bypass operations using vein grafts. 

We believe that the VGS product will be a direct competitor to our eSVS 
Mesh if and when the results of their on-going clinical trial in Great 
Britain allow VGS to secure a CE Mark approval for their product. 

We believe that the Alpha Research and B. Braun products are not currently 
direct competitors to our eSVS Mesh, and are not likely to become direct 
competitors in the near future, because the Biocompound Graft is intended 
for use only with irregularly shaped veins and the ProVena is intended for 
use with non-coronary procedures. However, it is possible that one or both 
of these companies, or other potential competitors, will seek approval to 
use these or similar devices for procedures with similar or identical 
indications for use as our eSVS Mesh. 

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 CABG surgery. We believe a potential 
disadvantage associated with our eSVS Mesh is the possibility of allergic 
reaction to the implant materials. According to a July 2009 article in the 
Journal of Invasive Cardiology, nickel allergy after implantation of a 
nitinol-containing device is rare. This article described the rate of 
nickel allergy in cardiovascular implants to be between 0.002% and 0.02%. 
The article also stated that the patients with nickel allergy symptoms 
responded to medical management at the time of the reaction, did not require 
device explant, and no longer require medications for the reaction. In order 
to further safeguard against this rare occurrence, the eSVS Mesh instructions 
for use state that it is contraindicated for patients with a known allergy 
to nitinol. We believe another potential disadvantage associated with our 
eSVS Mesh is the possibility of damage to the saphenous vein during 
placement of our eSVS Mesh. If the physician does not select the proper 
size eSVS Mesh relative to the size of the vein, the saphenous vein may be 
damaged while placing our eSVS Mesh over the vein. For example, if too 
small an eSVS Mesh is chosen, there could be damage to the saphenous vein 
caused by stretching the vein while trying to place it inside our eSVS Mesh. 
We have provided specific directions in the eSVS Mesh instructions for use 
on how to properly size veins and place our eSVS Mesh. In addition, we 
provide a sizing tool with our eSVS Mesh to ensure proper vein sizing. 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, we 
expect that other medical device companies, many of which are larger and 
have greater financial resources than we do, will seek to enter into this 
market by introducing competing technologies.