S-1

As filed with the Securities and Exchange Commission on March 13, 2006

Registration No. 333-         

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

RESTORE MEDICAL, INC.

(Exact name of registrant as specified in its charter)

Delaware	3842	41-1955715
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification No.)

2800 Patton Road

St. Paul, Minnesota 55113

(651) 634-3111

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

J. Robert Paulson, Jr.

Chief Executive Officer

Restore Medical, Inc.

2800 Patton Road

St. Paul, Minnesota 55113

(651) 634-3111

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

Copies to:

Kenneth L. Cutler
Robert A. Kuhns
Dorsey & Whitney LLP
50 South Sixth Street
Minneapolis, Minnesota 55402
(612) 340-2600
Fax: (612) 340-2868 Mark C. Smith
Allison R. Schneirov
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036
(212) 735-3000
Fax: (212) 735-2000

     Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

     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, 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

CALCULATION OF REGISTRATION FEE

	Proposed Maximum
	Aggregate Offering	Amount of
Title of Each Class of Securities to be Registered	Price(1)	Registration Fee(2)
Common stock, $0.01 par value per share	$50,000,000	$5,350

(1)	Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933. Includes the offering price attributable to shares available for purchase by the underwriters to cover over-allotments, if any.
(2)	Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price.

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

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

Subject to Completion, Dated March 13, 2006

Restore Medical, Inc.

            Shares

Common Stock

This is the initial public offering of Restore Medical, Inc. No public market current exists for our common stock. We are offering           shares of our common stock. We anticipate that the initial public offering price will be between $          and $           per share.

We intend to apply to have our common stock quoted on the NASDAQ National Market under the symbol “REST.”

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 6 of this prospectus.

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

	Per Share	Total
Public offering price	$	$
Underwriting discounts and commissions	$	$
Proceeds, before expenses, to Restore Medical	$	$

We have granted the underwriters the right to purchase up to           additional shares of common stock to cover any over-allotments.

Deutsche Bank Securities

Sole Book-Running Manager                                               

RBC Capital Markets

Co-Lead Manager

First Albany Capital

The date of this prospectus is                     , 2006.

PROSPECTUS SUMMARY

      This summary highlights selected information contained in greater detail elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our common stock. You should carefully read the entire prospectus, including “Risk Factors” beginning on page 6 and the financial statements and related notes, before making an investment decision.

Our Business

      We develop, manufacture and market our proprietary Pillar^® palatal implant system, or Pillar System, a simple, innovative, minimally-invasive, implantable medical device to treat sleep disordered breathing, which includes obstructive sleep apnea, or OSA, and snoring. During the Pillar Procedure, a physician implants three small, braided, proprietary polyester inserts into the muscle of the soft palate to stiffen it and add structural support. This stiffening minimizes or eliminates the palatal tissue vibration that can cause snoring and the collapse that can obstruct the upper airway and cause OSA. We currently market and sell our Pillar System to otolaryngologists, or ENTs, and to a limited number of oral maxillofacial surgeons. We believe the Pillar Procedure is a safe, clinically effective, long-lasting, low-risk procedure with minimal pain or complications that offers significant benefits to both patients and physicians over other available treatment options for mild to moderate OSA and snoring.

      Our Pillar System was cleared by the United States Food and Drug Administration, or FDA, for snoring in December 2002 and for mild to moderate OSA in July 2004. Our Pillar System also has received CE Mark certification for both mild to moderate OSA and snoring from the European Commission in December 2004 and May 2003, respectively. More than 1,000 physicians have performed collectively over 11,000 Pillar Procedures world-wide to date, with the average price that patients pay in the United States ranging from $1,200 to $2,500.

Our Market Opportunity

      As reported in the April 2004 Journal of the American Medical Association, it is estimated that one in five adults, or approximately 44 million people, in the United States suffers from mild OSA, and that one in 15 adults, or approximately 15 million people, in the United States suffers from moderate or more severe OSA. Internationally, the aggregate number of people with OSA is estimated to exceed that in the United States, including approximately 20 million people in Western Europe, 57 million people in China and 47 million people in India. OSA is a potentially harmful breathing condition caused by one or more obstructions of the upper airway during sleep. Individuals suffering from OSA experience frequent interruptions during sleep, resulting in excessive daytime sleepiness that can lead to memory loss, lack of concentration, depression and irritability. OSA also has been linked to more severe health consequences, including increased risks of cardiovascular morbidity, high blood pressure, stroke, heart attack and Type II diabetes. The traditional treatment for OSA has been continuous positive airway pressure, or CPAP, which is a life-long therapy that requires patients to wear a nasal or facial mask connected to a portable airflow generator while sleeping. Although CPAP is effective if used continuously every night, the discomfort and inconvenience of wearing a mask to bed have resulted in CPAP non-compliance rates of more than 50%. Surgical treatments for OSA include the permanent removal or destruction of the tissue of the soft palate. Not only are such invasive treatments painful, but often they are clinically ineffective, require multiple treatments and may offer only a short-term solution.

      In a separate report, the American Academy of Otolaryngology, or AAO, estimates that one in four adults, or 55 million people, in the United States suffers from habitual snoring. Because most people who have OSA snore, the number of people with OSA overlaps significantly with the number of people who snore. Snoring often significantly affects the

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harmony and relationship between the affected individual and his or her bed partner. The average non-snoring bed partner loses approximately an hour of sleep each night as a result of his or her partner’s snoring. Additionally, a recent survey of 1,008 adults determined that where one partner is a heavy snorer, 31% of the couples surveyed adjust their sleeping habits by sleeping apart, altering their sleep schedules or wearing ear plugs while sleeping. Prior to the Pillar Procedure, the only available options to treat snoring have been lifestyle changes such as weight loss or sleeping position adjustment, oral appliances or over-the-counter remedies such as nasal strips, which are both ineffective to treat the soft palate, or painful, palatal surgical procedures.

Our Solution

      Our Pillar System is a proprietary, innovative, minimally-invasive, first-line treatment option for mild to moderate OSA and habitual or socially disruptive snoring. To date, 13 clinical studies with 357 participants have been completed on the use of the Pillar Procedure to treat mild to moderate OSA and snoring. The results of these clinical studies have served as the basis for our regulatory approvals, product claims and market acceptance.

      Based on the results of these clinical studies, and with over 11,000 Pillar Procedures performed to date, we believe our Pillar System offers significant advantages over other therapies because our solution:

•  is a clinically effective and long-lasting treatment;

•  is a low-risk, minimally invasive procedure with limited pain and few complications and eliminates the inconvenience and discomfort of sleeping with a mask;

•  requires the use of only topical and local anesthetics, resulting in a significantly shorter recovery period;

•  is a one-time, 20-minute, in-office procedure; and

•  offers economic benefits to patients, physicians and payors given its relatively low cost and short procedure time.

Our Product

      The Pillar Procedure involves the implantation of three proprietary polyester inserts into the soft palate by a physician. We pre-load each insert into a specially engineered, single-use delivery tool, which is packaged individually in a sterile package. We braid each Pillar insert to our precise specifications from a well-known biocompatible polyethylene terephthalate fiber that has been used for years in implantable medical products such as surgical sutures and heart valve cuffs. We designed the Pillar inserts to stiffen and provide structural support to the soft palate tissue to prevent the fluttering or collapse of the soft palate, without interfering with normal soft palate functions such as swallowing or speech. The insertion triggers the body’s natural fibrotic response to injury and the introduction of a foreign body during the weeks following the procedure, promoting tissue growth around and into the Pillar inserts, thereby providing additional stiffening and structural support.

Our Strategy

      Our goal is to have the Pillar Procedure recognized by the market as the preferred first-line palatal surgical treatment for patients suffering from mild to moderate OSA and snoring. We also intend to establish the Pillar Procedure as the preferred alternative treatment for individuals who are unable or unwilling to comply with CPAP therapy or who seek a safe and clinically effective alternative to CPAP therapy for reasons of lifestyle flexibility and convenience. To

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achieve these goals, we must successfully develop the market for the Pillar Procedure in the United States and internationally. We are undertaking the following key growth strategies and related tactics:

•  hire additional domestic sales representatives and engage additional international distributors;

•  increase physician awareness and adoption of the Pillar Procedure over other treatment options for patients suffering from sleep disordered breathing, and expand our marketing, co-marketing and sleep disordered breathing education initiatives with physicians;

•  enhance awareness and selection of the Pillar Procedure by patients and their bed partners through innovative, targeted, direct-to-consumer marketing programs and initiatives;

•  sponsor and participate in additional clinical studies that seek to further validate the clinical effectiveness of the Pillar Procedure as a stand-alone treatment for mild to moderate OSA and snoring or in combination with CPAP therapy to treat other areas of upper airway obstruction that cause OSA and snoring, and further expand the FDA-cleared indications for use of the Pillar Procedure;

•  continue building our self-pay snoring business and increase efforts to establish adequate and appropriate third-party healthcare insurance coverage and reimbursement for use of the Pillar Procedure to treat mild to moderate OSA; and

•  proactively explore new products and technologies that would allow us to effectively treat other areas of upper airway collapse.

      In the future, we intend to expand our marketing efforts beyond ENTs and oral maxillofacial surgeons to other physicians who treat sleep disordered breathing. We believe that the Pillar Procedure offers physicians a clinically-effective, economically attractive, in-office procedure to treat their patients who are afflicted with mild to moderate OSA and snoring.

Our Corporate Information

      We were incorporated in Minnesota in November 1999 and reincorporated in Delaware in May 2004. Our principal executive offices are located at 2800 Patton Road, St. Paul, Minnesota 55113, and our telephone number is (651) 634-3111. Our website address is www.restoremedical.com. The information on, or that may be accessed through, our website is not incorporated by reference into this prospectus and should not be considered a part of this prospectus.

      Pillar^® and the Restore Medical logo are registered trademarks of Restore Medical, Inc. This prospectus contains other trade names and service marks of Restore Medical and of other companies.

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The Offering

Common stock offered by Restore Medical	shares
Common stock to be outstanding after this offering	shares
Over-allotment option	shares
Use of proceeds	We intend to use the net proceeds of this offering for working capital and general corporate purposes, including expanding our domestic and international sales organizations, increasing the size, scope and coverage of our marketing programs and initiatives, increasing our new product development efforts and increasing our clinical study initiatives. See “Use of Proceeds” for additional information.
Risk factors	See “Risk Factors” for a discussion of factors you should consider carefully before deciding to invest in our common stock.
Proposed Nasdaq National Market symbol	REST

      The number of shares of our common stock that will be outstanding immediately after this offering is based on the number of shares outstanding as of March 3, 2006. This number assumes the conversion into common stock of all shares of our preferred stock. The number of outstanding shares excludes:

•  768,680 shares of common stock issuable upon the exercise of warrants outstanding as of March 3, 2006, including preferred stock warrants, on an as-if converted basis and at a weighted average exercise price of $1.60 per share;

•  1,405,862 shares of common stock issuable upon the exercise of options outstanding as of March 3, 2006, at a weighted average exercise price of $1.09 per share; and

•  1,813,212 shares of common stock expected to be available for future issuance under our stock incentive plans upon completion of this offering.

      Except where we state otherwise, the information we present in this prospectus reflects:

•  a 1-for-2 reverse split of our common stock, which will occur before the completion of this offering, but after the conversion of all of the outstanding shares of our preferred stock into shares of our common stock;

•  the conversion of all of the outstanding shares of our preferred stock into 10,395,299 shares of common stock upon completion of this offering on a post-split basis and after effecting a change in the Series C and Series C-1 conversion price to common stock from $2.62 to $1.74 per share;

•  amendments to our charter and bylaws to be effective upon completion of this offering; and

•  no exercise by the underwriters of their over-allotment option.

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Summary Financial Data

      The following tables summarize our financial data for the periods presented. The summary statement of operations data for the years ended December 31, 2003, 2004 and 2005, and the balance sheet data as of December 31, 2005, are derived from our audited annual financial statements included elsewhere in this prospectus. The historical results are not necessarily indicative of the results to be expected for any future periods. You should read this data together with the financial statements and related notes appearing elsewhere in this prospectus, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the other financial information included elsewhere in this prospectus.

	Year Ended December 31,
	2003			2004
	(Restated)			(Restated)			2005
Statement of Operations Data:
Net sales	$	368,201		$	944,816		$	4,854,235
Cost of sales		412,316			790,805			1,641,390
Gross margin (loss)		(44,115	)		154,011			3,212,845
Loss from operations		(7,680,691	)		(8,315,592	)		(6,575,680	)
Net loss		(9,411,476	)		(7,554,227	)		(7,021,200	)
Net loss attributable to common stockholders		(9,456,417	)		(7,806,033	)		(7,021,200	)
Net loss per share	$	(11.42	)	$	(6.52	)	$	(5.73	)
Basic and diluted weighted average common shares outstanding		827,819			1,196,366			1,224,350

      As adjusted information in the following table reflects (a) the conversion of all of the outstanding shares of our preferred stock into 10,395,299 shares (on a post-split basis) of our common stock upon the completion of this offering, (b) the reclassification of all outstanding preferred stock warrants subject to redemption to common stock warrants and (c) our sale of           shares of common stock in this offering at an assumed initial public offering price of $           per share (the mid-point of the initial public offering price range set forth on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and offering expenses, and the application of the net proceeds from those shares.

	As of December 31, 2005
	Actual			As Adjusted
Balance sheet data:
Cash and cash equivalents	$	3,396,577
Working capital		4,058,376
Total assets		6,394,745
Total current liabilities		1,767,665
Total liabilities		4,228,703
Convertible participating preferred stock		39,208,857
Total common stockholders’ equity (deficit)		(37,042,815	)

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RISK FACTORS

      An investment in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below and all the other information contained in this prospectus, including our financial statements and related notes, before you decide whether to purchase our common stock. The market price of our common stock could decline due to any of these risks and uncertainties, and you may lose part or all of your investment.

Risks Relating to Our Business and Industry

We will not be successful if the medical community does not adopt our Pillar System for the treatment of mild to moderate obstructive sleep apnea or snoring.

      The first commercially available product based on our proprietary palatal implant technology is our patented Pillar System. Our success depends on the medical community’s acceptance and adoption of our Pillar System as a minimally-invasive treatment for individuals suffering from mild to moderate OSA and socially disruptive and habitual snoring. Currently, a relatively limited number of otolaryngologists (ear, nose and throat physicians, or ENTs) and oral maxillofacial surgeons regularly perform the Pillar Procedure. We cannot predict how quickly, if at all, the medical community will accept our Pillar System, or, if accepted, the extent of its use. For us to be successful, our physician customers must:

•  believe that the Pillar Procedure offers meaningful clinical and economic benefits as compared to the other surgical and non-surgical procedures or devices currently being used to treat patients suffering from mild to moderate OSA or snoring;

•  use our Pillar System to treat individuals suffering from mild to moderate OSA or snoring either as a stand-alone treatment or in combination with procedures to treat other areas of upper airway obstruction, and achieve acceptable clinical outcomes in the patients they treat;

•  believe patients will pay for the Pillar Procedure out-of-pocket; and

•  be willing to commit the time and resources required to modify the way in which they currently treat, or have historically treated, patients suffering from mild to moderate OSA and snoring.

If the medical community is slow to adopt, or fails to adopt, the Pillar Procedure as a treatment for individuals suffering from mild to moderate OSA and snoring, we would suffer a material adverse effect on our business, financial condition and results of operations.

We expect to derive substantially all of our future revenues from sales of a single product.

      Currently, our only product is our Pillar System. We expect that sales of our Pillar System will account for substantially all of our revenues for the foreseeable future. We currently market and sell our Pillar System in the United States and in 12 countries in Asia Pacific, Europe, the Middle East and South Africa. Because the Pillar Procedure is different from current surgical and non-surgical treatments for mild to moderate OSA and snoring, we cannot assure you that physicians will perform the Pillar Procedure, and demand for our Pillar System may decline or may not increase as quickly as we expect. Also, we cannot assure you that the Pillar Procedure will compete effectively as a treatment alternative to other more well-known and well-established therapies, such as CPAP, or other more common palatal surgical procedures. Since our Pillar System currently is our only product, decreased or lower than expected sales would cause us to lose all or substantially all of our revenues.

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We have incurred losses and we may not be profitable in the future.

      Since we commenced operations in 1999, we have incurred net losses primarily from costs relating to the development and commercialization of our Pillar System. As of December 31, 2005, we had an accumulated deficit of $38.1 million. We expect to significantly increase our investment in our sales and marketing and research and development activities and, therefore, we expect to incur net losses through at least 2008. This business strategy may not be successful, and we may not become profitable in any future period. If we do become profitable, we cannot be certain that we will be able to sustain or increase profitability on a quarterly or annual basis.

Our future operating results are difficult to predict and may vary significantly from quarter to quarter, which may adversely affect the price of our common stock.

      Our limited history of sales of our Pillar System, together with our history of losses, make prediction of future operating results difficult. You should not rely on our past revenue growth as any indication of future growth rates or operating results. The price of our common stock likely will fall in the event our operating results do not meet the expectations of analysts and investors. Comparisons of our quarterly operating results are an unreliable indication of our future performance because they are likely to vary significantly based on many factors, including:

•  the demand for and acceptance of our Pillar System to treat mild to moderate OSA and snoring by both physicians and patients;

•  the success of alternative therapies and surgical procedures to treat individuals suffering from sleep disordered breathing, and the possible future introduction of new products and treatments for sleep disordered breathing;

•  our ability to maintain current pricing for our Pillar System;

•  the expansion and rate of success of our direct sales force in the United States and our independent distributors internationally;

•  the successful completion of current and future clinical studies, the presentation and publication of positive outcomes data from these clinical studies, and the increased adoption of the Pillar Procedure by physicians as a result of this clinical study data;

•  actions relating to ongoing FDA and European Union, or EU, compliance;

•  the size and timing of orders from physician customers and independent distributors;

•  our ability to obtain reimbursement for the Pillar Procedure for the treatment of mild to moderate OSA in the future from third-party healthcare insurers;

•  the willingness of patients to pay out-of-pocket for the Pillar Procedure for the treatment of snoring and, in the absence of reimbursement from third-party healthcare insurers, for the treatment of mild to moderate OSA;

•  unanticipated delays in the development and introduction of our future products and/or an inability to control costs;

•  seasonal fluctuations in revenue due to the elective nature of all sleep-disordered breathing treatments, including the Pillar Procedure; and

•  general economic conditions as well as those specific to our customers and markets.

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Further clinical studies of our Pillar System may adversely impact our ability to generate revenue if they do not demonstrate that our Pillar System is clinically effective for currently specified or expanded indications or if they are not completed in a timely manner.

      We have conducted, and continue to conduct, a number of clinical studies of the use of our Pillar System to treat patients suffering from mild to moderate OSA and snoring in the United States, Europe, Hong Kong and Singapore. We are in the process of obtaining two-year follow-up data on patients who participated in a snoring clinical study in the United States; three-year follow-up data on patients who participated in a snoring clinical study in Europe; two-year follow-up data on patients who participated in an OSA clinical study in Europe; and one-year follow-up data on patients who participated in an OSA clinical study in the United States. In addition, we are involved in a number of ongoing clinical studies evaluating clinical outcomes from the use of the Pillar Procedure, including prospective, randomized, placebo-controlled studies, as well as clinical studies that are structured to obtain clearance from the FDA and the EU for expanded clinical indications for use of our Pillar System.

      We cannot assure you that these clinical studies will continue to demonstrate that our Pillar System provides long-term clinical effectiveness for individuals suffering from mild to moderate OSA or snoring, nor can we assure you that the use of our Pillar System will prove to be safe and effective in clinical studies under United States or international regulatory guidelines for any expanded indications. Additional clinical studies of our Pillar System may identify significant clinical, technical or other obstacles that will have to be overcome prior to obtaining clearance from the applicable regulatory bodies to market our Pillar System for such expanded indications. If further studies of our Pillar System indicate that the Pillar Procedure is not a safe and effective treatment of mild to moderate OSA or snoring, our ability to market our Pillar System, and generate substantial revenue from additional sales of our Pillar Systems, may be materially limited.

      Individuals selected to participate in these further clinical studies must meet certain anatomical and other criteria to participate. We cannot assure you that an adequate number of individuals can be enrolled in clinical studies on a timely basis. Further, we cannot assure you that the clinical studies will be completed as planned. A delay in the analysis and publication of the positive outcomes data from these clinical studies, or the presentation or publication of negative outcomes data from these clinical studies, including data related to approval of our Pillar System for expanded indications, may materially impact our ability to increase revenues through sales and negatively impact our stock price.

Our business and results of operations may depend upon the ability of healthcare providers to achieve adequate levels of third-party reimbursement.

      Generally, the Pillar Procedure is paid for entirely out-of-pocket by patients, whether the patient is being treated for OSA or snoring. Third-party healthcare insurers typically consider any snoring treatment to be an elective cosmetic procedure, and do not cover payment for such procedures. We believe that all treatments for snoring, including the Pillar Procedure, will continue to be considered elective procedures, and therefore, procedures for which patients will pay out-of-pocket. Our ability to generate revenue from additional sales of our Pillar System for the treatment of snoring may be materially limited by the fact that it is unlikely that it will ever be covered by a third-party healthcare insurer.

      The cost of treatments for OSA, such as CPAP, and most surgical procedures generally are reimbursed by third-party healthcare insurers. The Pillar Procedure currently does not, and may not in the future, qualify for reimbursement for the treatment of OSA. Our ability to generate revenue from additional sales of our Pillar System for the treatment of OSA may be materially limited by the extent to which reimbursement of the Pillar Procedure for the treatment of mild to

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moderate OSA is available in the future. In addition, third-party healthcare insurers are increasingly challenging the prices charged for medical products and procedures. In the event that we are successful in our efforts to obtain reimbursement for the Pillar Procedure, any changes in this reimbursement system could materially affect our ability to continue to grow our business.

      Reimbursement and healthcare payment systems in international markets vary significantly by country and reimbursement for the Pillar Procedure may not be available at all under either government or private reimbursement systems. If we are unable to achieve reimbursement approvals in international markets, it could have a negative impact on market acceptance of our Pillar System and potential revenue growth in the markets in which these approvals are sought.

Our products and manufacturing activities are subject to extensive governmental regulation that could prevent us from selling our Pillar System or introducing new and/or improved products in the United States or internationally.

      Our products and manufacturing activities are subject to extensive regulation by a number of governmental agencies, including the FDA, the EU, and comparable international regulatory bodies. We are required to:

•  obtain clearance from the FDA, the EU and certain international regulatory bodies before we can market and sell our products;

•  satisfy all content requirements for the labeling, sales and promotional materials associated with our Pillar System and the Pillar Procedure; and

•  undergo rigorous inspections of our facilities, manufacturing and quality control processes, records and documentation.

      Compliance with the rules and regulations of these various regulatory bodies may delay or prevent us from introducing any new models of our Pillar System or other new products. In addition, government regulations may be adopted that could prevent, delay, modify or rescind regulatory clearance or approval of our products.

      We are required to demonstrate compliance with the FDA’s and EU’s quality system regulations. The FDA and the EU enforce their quality system regulations through pre-approval and periodic post-approval inspections by representatives from the FDA and the designated notified body for the EU, respectively. These regulations relate to product testing, vendor qualification, design control and quality assurance, as well as the maintenance of records and documentation. If we fail to conform to these regulations, the FDA or the EU may take actions that could seriously harm our business. These actions include sanctions, including temporary or permanent suspension of our operations, product recalls and marketing restrictions. A recall or other regulatory action could substantially increase our costs, damage our reputation and materially affect our operating results.

Our products are currently not recommended by most pulmonologists, who are integral to the diagnosis and treatment of sleep breathing disorders.

      The majority of patients being treated today for OSA, domestically and internationally, are initially referred to pulmonologists by their primary care physicians. Pulmonologists typically administer a polysomnography, or overnight sleep study, to diagnose the presence and severity of OSA. If an individual is diagnosed with OSA or snoring by a pulmonologist, the pulmonologist typically prescribes CPAP as therapy of choice. Pulmonologists, generally, do not endorse palatal surgical procedures to their patients for the treatment of OSA or snoring, often citing uncertainty in clinical outcomes, among other factors. Our domestic sales organization does not generally call on pulmonologists or sleep centers to sell our Pillar System, and we do not believe that most pulmonologists today would recommend the Pillar Procedure to their

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patients suffering from mild to moderate OSA and/or snoring. We cannot predict the extent to which pulmonologists will, in the future, endorse or recommend the Pillar Procedure to their mild to moderate OSA and snoring patients, even for those patients who are unwilling or unable to comply with CPAP therapy.

We face significant competition in the market for treating sleep breathing disorders.

      The market for treating sleep disordered breathing is highly competitive and the Pillar Procedure must compete with more established products, treatments and surgical procedures, which may limit our growth and negatively affect our business. Many of our competitors have an established presence in the field of treating sleep disordered breathing and have established relationships with pulmonologists, sleep clinics and ENTs, which play a significant role in determining which product, treatment or procedure is recommended to the patient. We believe certain of our competitors are attempting to develop innovative approaches and new products for diagnosing and treating OSA and other sleep disordered breathing conditions. We cannot predict the extent to which ENTs, oral maxillofacial surgeons, primary care physicians or pulmonologists would or will recommend our Pillar System over new or other established devices, treatments or procedures.

      In addition, we have limited resources with which to market, develop and sell our Pillar System. Many of our competitors have substantially greater financial and other resources than we do, including larger research and development staffs who have more experience and capability in conducting research and development activities, testing products in clinical trials, obtaining regulatory approvals and manufacturing, marketing, selling and distributing products. Some of our competitors may achieve patent protection, regulatory approval or product commercialization more quickly than we do, which may decrease our ability to compete. If we are unable to be competitive in the market for sleep disordered breathing, our revenues will decline, negatively affecting our business.

Our Pillar System may become obsolete if we are unable to anticipate and adapt to rapidly changing technology.

      The medical device industry is subject to rapid technological innovation and, consequently, the life cycle of any particular product can be short. Alternative products, procedures or other discoveries and developments to treat OSA and snoring may render our Pillar System obsolete. Furthermore, the greater financial and other resources of many of our competitors may permit them to respond more rapidly than we can to technological advances. If we fail to develop new technologies, products or procedures to upgrade or improve our existing Pillar System to respond to a changing market before our competitors are able to do so, our ability to market our products and generate substantial revenues may be limited.

Our international sales are subject to a number of risks that could seriously harm our ability to successfully commercialize our Pillar System in international markets.

      Our international sales are subject to several risks, including:

•  the ability of our independent distributors to market and sell our Pillar System and train physicians to perform the Pillar Procedure;

•  the ability of our independent distributors to sell the quantity of Pillar Systems they have committed to purchase from us in their respective distribution agreements;

•  our ability to identify new independent third-party distributors in international markets where we do not currently have distributors;

•  the impact of recessions in economies outside the United States;

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•  greater difficulty in collecting accounts receivable and longer collection periods;

•  unexpected changes in regulatory requirements, tariffs or other trade barriers;

•  weaker intellectual property rights protection in some countries;

•  potentially adverse tax consequences; and

•  political and economic instability.

      The occurrence of any of these events could seriously harm our future international sales and our ability to successfully commercialize our products in international markets, thereby limiting our growth and revenues.

We depend on a few international third-party distributors that currently represent a significant portion of our Pillar System sales revenue, and the loss of one or more of such distributors could reduce our future sales revenue.

      We currently market and sell the Pillar System internationally in 12 countries in Asia Pacific, Europe, the Middle East and South Africa through third-party distributors, with the exception of Germany where we sell directly to certain physician customers. We began selling the Pillar System internationally during 2005, and as of December 31, 2005 sales of Pillar Systems to our international distributor in China represented approximately 11% of our total worldwide sales revenue. A decision by these third-party distributors to discontinue selling our Pillar Systems or reduce their future purchases of Pillar Systems could significantly reduce our future sales revenue.

The failure of large US customers or international third-party distributors to pay for their purchases of Pillar Systems on a timely basis could reduce our future sales revenue and negatively impact our liquidity.

      The timing and extent of our future growth in sales revenue depends, in part, on our ability to continue to increase the number of US physicians performing the Pillar Procedure, as well as expanding the number of Pillar Procedures performed by these physicians. Similarly, our international distributors must continue to increase the number of physicians performing the Pillar Procedure in their territories, as well as expanding the number of Pillar Procedures performed by these physicians. To the extent one or more of our large US physician customers or international distributors fails to pay us for Pillar Systems on a timely basis, we may be required to discontinue selling to these organizations and find new customers and/or replacement distributors, which could reduce our future sales revenue and negatively impact our liquidity.

We depend on our patents and proprietary technology, which we may not be able to protect.

      Our success depends, in part, on our ability to obtain and maintain patent protection for the Pillar Procedure and our Pillar System and their components and processes. Our success further depends on our ability to obtain and maintain trademark protection for our name and mark; to preserve our trade secrets and know-how; and to operate without infringing the intellectual property rights of others. We currently have issued or pending patents in several countries, including in the United States, Germany, Great Britain, Norway, Hong Kong, Singapore, Canada, China, the EU, Japan, South Korea, Australia, Indonesia, Malaysia and Taiwan, as well as pending Patent Cooperation Treaty, or PCT, Applications. We cannot assure you that any of our pending or future patent applications will result in issued patents, that any current or future patents will not be challenged, invalidated or circumvented, that the scope of any of our patents will exclude competitors or that the patent rights granted to us will provide us any competitive advantage. We may discover that our technology infringes patents or other rights owned by

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others, and we cannot be certain that we were the first to make the inventions covered by each of our issued patents and our pending patent applications, or that we were the first to file patent applications for such inventions. In addition, we cannot assure you that our competitors will not seek to apply for and obtain patents that will prevent, limit or interfere with our ability to make, use or sell our products either in the United States or in international markets. Further, the laws of certain foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States.

      In addition to patents, we rely on trademarks to protect the recognition of our company and product in the marketplace. We have trademark registrations for our name and mark principally in the United States, as well as registrations or pending applications in China, the EU, Indonesia and Singapore, and accordingly may not have protection for our name and mark in other jurisdictions. We also rely on trade secrets, know-how, and proprietary knowledge that we seek to protect, in part, through confidentiality agreements with employees, consultants and others. We cannot assure you that our proprietary information will not be shared, our confidentiality agreements will not be breached, that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known to or independently developed by competitors.

We may face intellectual property infringement claims that would be costly to resolve.

      There has been substantial litigation regarding patent and other intellectual property rights in the medical device industry, and our competitors may initiate intellectual property litigation as a means of competition. Intellectual property litigation is complex and expensive and outcomes are difficult to predict. We cannot assure you that we will not become subject to patent infringement claims or litigation, or interference proceedings, to determine the priority of inventions. Litigation or regulatory proceedings also may be necessary to enforce our patent or other intellectual property rights. We may not always have the financial resources to assert patent infringement suits or to defend ourselves from claims. An adverse result in any litigation could subject us to liabilities, or require us to seek licenses from or pay royalties to others that may be substantial. Furthermore, we cannot predict the extent to which the necessary licenses would be available to us on satisfactory terms, if at all.

We may face product liability claims that could result in costly litigation and significant liabilities.

      The manufacture and sale of medical products entail significant risk of product liability claims. The medical device industry, in general, has been subject to significant medical malpractice litigation. Any product liability claims, with or without merit, could result in costly litigation, reduced sales, cause us to incur significant liabilities and divert our management’s time, attention and resources. Because of our limited operating history and lack of experience with these claims, we cannot be sure that our product liability insurance coverage is adequate or that it will continue to be available to us on acceptable terms, if at all.

We depend on a few suppliers for key components, making us vulnerable to supply shortages and price fluctuation.

      We purchase components for our Pillar System from a variety of vendors on a purchase order basis; we have no long-term supply contracts with any of our vendors. While it is our goal to have multiple sources to procure certain key components, in some cases it is not economically practical or feasible to do so. To mitigate this risk, we maintain an awareness of alternate supply sources that could provide our currently single-sourced components with minimal or no modification to the current version of our Pillar System, practice supply chain management, maintain safety stocks of critical components and have arrangements with our key vendors to manage the availability of critical components. Despite these efforts, if our

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vendors are unable to provide us with an adequate supply of components in a timely manner, or if we are unable to locate qualified alternate vendors for components at a reasonable cost, the cost of our products would increase, the availability of our products to our customers would decrease and our ability to generate revenues could be materially limited.

Our sales and marketing efforts may not be successful.

      We currently market and sell our Pillar System to ENTs and to a limited number of oral maxillofacial surgeons. The commercial success of our Pillar System ultimately depends upon a number of factors, including the number of physicians who perform the Pillar Procedure, the number of Pillar Procedures performed by these physicians, the number of patients who become aware of the Pillar Procedure by self-referral or referrals by their primary care physicians, the number of patients who elect to undergo the Pillar Procedure, and the number of patients who, having successfully undergone the Pillar Procedure, endorse and refer the Pillar Procedure to other potential patients. The Pillar Procedure may not gain significant increased market acceptance among implanting physicians, patients, third-party healthcare insurers and managed care providers. Primary care physicians may elect to refer individuals suffering from sleep disordered breathing to pulmonologists or other physicians who treat sleep disordered breathing rather than to ENTs or oral maxillofacial surgeons, and these physicians may not recommend the Pillar Procedure to patients for any number of reasons, including safety and clinical efficacy, the availability of alternative procedures and treatment options, or inadequate levels of reimbursement. In addition, while positive patient experiences can be a significant driver of future sales, it is impossible to influence the manner in which this information is transmitted and received, the choices potential patients may make and the recommendations that treating physicians make to their patients.

      We have limited experience in marketing and selling our Pillar System through a direct sales organization in the United States and through third-party distributors internationally. We currently sell directly to certain physician customers in Germany, and are in the process of identifying an independent third-party distributor for the German market. We may not be able to maintain a suitable sales force in the United States or suitable number of third-party distributors outside the United States, or enter into or maintain satisfactory marketing and distribution arrangements with others. Our marketing and sales efforts may not be successful in increasing awareness and sales of our Pillar System.

The failure to educate or train a sufficient number of physicians in the use of our Pillar System could reduce the market acceptance of our Pillar System and reduce our revenues.

      It is critical to the success of our sales efforts that there is an increasing number of physicians familiar with, trained in, and proficient in the use of our Pillar System. Currently, physicians learn to use our system through hands-on, on-site training by our representatives in conjunction with performing the Pillar Procedures. However, to receive this training, physicians must be aware of the Pillar Procedure as a treatment option for mild to moderate OSA and snoring and be interested in using the Pillar Procedure in their practice. We cannot predict the extent to which physicians will dedicate the time and energy necessary for adequate training in the use of our Pillar System, have the knowledge of or experience in the clinical outcomes of the Pillar Procedure or feel comfortable enough performing the Pillar Procedure to recommend it to their patients. Even if a physician is well versed in the Pillar Procedure, he or she may be unwilling to require patients to pay for the Pillar Procedure out-of-pocket. If physicians do not continue to accept and recommend the Pillar Procedure, our revenues could be materially affected.

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All of our operations are conducted at a single location; therefore, any disruption at our existing facility could substantially affect our business.

      We manufacture our Pillar System at one facility using certain specialized equipment. Although we have contingency plans in effect for certain natural disasters, as well as other unforeseen events that could damage our facility or equipment, any such events could materially interrupt our manufacturing operations. In the event of such an occurrence, we have business interruption insurance to cover lost revenues and profits. However, such insurance would not compensate us for the loss of opportunity and potential adverse impact on relations with existing customers created by an inability to produce our products.

We depend on certain key personnel.

      If we are unable to attract, train and retain highly-skilled technical, managerial, product development, sales and marketing personnel, we may be at a competitive disadvantage and unable to develop new products or increase revenue. The failure to attract, train, retain and effectively manage employees could negatively impact our research and development, sales and marketing and reimbursement efforts. In particular, the loss of sales personnel could lead to lost sales opportunities as it can take several months to hire and train replacement sales personnel. Uncertainty created by turnover of key employees could adversely affect our business.

We will need to carefully manage our expanding operations to achieve sustainable growth.

      To achieve increased revenue levels, complete clinical studies and develop future products, we believe that we will be required to periodically expand our operations, particularly in the areas of sales and marketing, clinical research, reimbursement, research and development, manufacturing and quality assurance. As we expand our operations in these areas, management will face new and increased responsibilities. To accommodate any growth and compete effectively, we must continue to upgrade and improve our information systems, as well as our procedures and controls across our business, and expand, train, motivate and manage our work force. Our future success will depend significantly on the ability of our current and future management to operate effectively. Our personnel, systems, procedures and controls may not be adequate to support our future operations. If we are unable to effectively manage our expected growth, this could have a material adverse effect on our business, financial condition and results of operations.

We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance requirements.

      We have never operated as a public company. As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act, together with new rules subsequently implemented by the Securities and Exchange Commission, or SEC, and the Nasdaq National Market, have imposed various new requirements on public companies, including requiring certain corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these new compliance requirements. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these new rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs to maintain the same or similar coverage.

      In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures. In particular,

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commencing in 2007, we must perform system and process evaluation and testing of our internal controls over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. During their audit of our financial statements for fiscal 2005, our independent registered public accounting firm determined that there were material weaknesses in our internal controls over financial reporting during fiscal 2005 because we lacked personnel with adequate technical accounting expertise to identify and account for unusual and complex debt and equity accounting matters, and lacked policies and procedures to ensure information was properly communicated to the accounting department to ensure timely and accurate financial reporting. We have substantially remediated the material weakness associated with the accounting for unusual and complex debt and equity instruments by reviewing and analyzing all historical instruments, applying the appropriate accounting treatment to the transactions associated with these instruments, and correcting errors in our historical financial statements. We also used independent third-party expert valuations to support the valuation of certain of these instruments and will continue to independently value such instruments until they expire or are otherwise converted. In recognition of the need to improve our technical and financial statement preparation and reporting expertise, we recently hired a chief financial officer with extensive public accounting and public company financial reporting experience, and we intend to supplement his experience with a controller who will also have the appropriate level of technical accounting and financial statement preparation and reporting experience. Finally, we have substantially remediated the weakness regarding the internal communication of accounting matters over the past year by implementing a series of internal operating and control procedures to ensure we accurately account for the financial impact of our business operations and prepare the requisite accounting statements in accordance with SEC and US GAAP. Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management efforts. If we are not able to comply with the requirements of Section 404 in a timely manner, if the steps taken to remedy the material weaknesses previously identified by our independent registered public accounting firm are not effective or if our independent registered public accounting firm identifies additional deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities.

Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us from executing our growth strategy.

      The timing and amount of our working capital and capital expenditure requirements may vary significantly depending on numerous factors, including the other risk factors described in this prospectus. Additional financing may not be available on terms favorable to us, or at all. Any additional capital we raise through the sale of equity or convertible debt securities may dilute your percentage ownership of our common stock. Furthermore, any new equity securities we issue could have rights, preferences and privileges superior to our common stock. Capital raised through debt financings could require us to make periodic interest payments and could impose potentially restrictive covenants on the conduct of our business.

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Risks Relating to this Offering and Ownership of Our Common Stock

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 offering price.

      Prior to this offering, you could not buy or sell our common stock publicly. 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. The market for medical device stocks has been extremely volatile. 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:

•  variations in our quarterly operating results;

•  departure of key personnel;

•  changes in governmental regulations and standards affecting the medical device industry and our products;

•  decreases in financial estimates, or negative commentary about us or the medical device industry by equity research analysts;

•  sales of common stock or other securities by us in the future;

•  decreases in market valuations of medical device companies; and

•  fluctuations in stock market prices and volumes.

      In the past, securities class action litigation often has been 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 will incur substantial costs and our management’s attention will be diverted from our operations. All of these factors could cause the market price of our stock to decline, and you may lose some or all of your investment.

If equity research analysts do not publish research or reports about our business, or if they issue unfavorable commentary 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 or the content and opinions included in their reports. The price of our common stock could decline if one or more equity research analysts downgrade our common stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.

Future sales of our common stock by existing stockholders could cause our stock price to decline.

      If our existing 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 common stock could also depress the market price of our common stock. All of our existing stockholders prior to this offering are subject to lock-up agreements with the underwriters that restrict their ability to transfer their stock for at least 180 days after the date of this prospectus. Upon expiration of the lock-up agreements,           shares of our common stock will be eligible for sale in the public market. The market price of our common stock may drop significantly when the restrictions on resale of these shares lapse and our existing stockholders are able to sell shares of our common stock into the market.

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      Following the offering, we also intend to increase the number of our registered shares of common stock by filing registration statements with the SEC covering (a) all of the shares of our common stock subject to options outstanding, but not exercised, at the close of the offering and (b) all of the shares available for future issuance under our stock incentive plan. In addition, upon completion of this offering, the holders of our preferred stock, including shares issuable upon exercise of outstanding warrants to purchase preferred stock, will hold an aggregate of 10,730,462 shares of common stock and have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. If we were to include in a company-initiated registration statement shares held by those holders pursuant to the exercise of their registration rights, the sale of those shares could impair our ability to raise needed capital by depressing the price at which we could sell our common stock.

      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.

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.

      Substantially all 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, including expanding our domestic and international marketing and sales organizations and programs, increasing our efforts to develop new products or technologies and increasing our clinical study initiatives. We have not yet determined the allocation of those net proceeds among the various uses described in this prospectus. Our management will have broad discretion over the use and investment of the net proceeds of this offering. You will not have the opportunity, as part of your investment decision, to assess whether our proceeds are being used appropriately. Pending the use of our proceeds, they may be placed in investments that do not produce income or that lose value.

Our directors and executive officers 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 executive officers and directors and entities affiliated with them will, in the aggregate, beneficially own           % of our outstanding common stock following the completion of this offering, assuming the underwriters do not exercise their over-allotment option. Our executive officers, directors 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.

Our organizational documents and Delaware law make a takeover of our company more difficult, which may prevent certain changes in control and limit the market price of our common stock.

      Our charter and bylaws and Section 203 of the Delaware General Corporation Law contain provisions that might enable our management to resist a takeover of our company. These provisions might discourage, delay or prevent a change in the control of our company or a

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change in our management. These provisions also could discourage proxy contests and make it more difficult for you and other stockholders to elect directors and take other corporate actions. The existence of these provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. Some provisions in our charter and bylaws may deter third parties from acquiring us, which may limit the market 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 shares of our common stock in this offering, you will experience immediate dilution of $           per share (based on the mid-point of the initial public offering price range set forth on the cover page of this prospectus), because the price that you pay will be substantially greater than the adjusted net tangible book value per share of common stock that you acquire. 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 capital stock. If the underwriters exercise their over-allotment option, or if outstanding options to purchase our common stock are exercised, you will experience additional dilution.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

      This prospectus contains forward-looking statements. Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words. These statements are only predictions. The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that may cause our, our customers’ or our industry’s actual results, levels of activity, performance or achievements expressed or implied by these forward-looking statements, to differ. “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” as well as other sections in this prospectus, discuss some of the factors that could contribute to these differences.

      The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

      This prospectus also contains market data related to our business and industry. These market data include projections that are based on a number of assumptions. While we believe these assumptions to be reasonable and sound as of the date of this prospectus, if these assumptions turn out to be incorrect, actual results may differ from the projections based on these assumptions. As a result, our markets may not grow at the rates projected by these data, or at all. The failure of these markets to grow at these projected rates may have a material adverse effect on our business, results of operations, financial condition and the market price of our common stock.

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USE OF PROCEEDS

      We estimate that the net proceeds from our sale of           shares of common stock in this offering will be approximately $           million, or approximately $           million if the underwriters exercise their over-allotment option in full, assuming an initial public offering price of $           per share (the mid-point of the initial public offering price range set forth on the cover page of this prospectus) and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us.

      We intend to use the net proceeds of this offering for working capital and general corporate purposes, including expanding our domestic and international marketing and sales organizations and programs, increasing our new product development efforts and increasing our clinical study initiatives. We have not yet determined with certainty the manner in which we will allocate these net proceeds. The amounts and timing of these expenditures will vary depending upon a number of factors, including the amount of cash generated by our operations, competitive and technological developments and the rate of growth, if any, of our business.

      Pending the uses described above, we intend to invest the net proceeds in United States government securities and other short-term, investment-grade, interest-bearing instruments.

DIVIDEND POLICY

      We have never declared or paid any cash dividends on our common stock and do not anticipate paying cash dividends on our common stock. We anticipate that we will retain all of our future earnings, if any, for use in the development and expansion of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon our financial condition and operating results.

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CAPITALIZATION

      The following table describes our capitalization as of December 31, 2005 on an actual basis and as adjusted to reflect:

•  the conversion of all of the outstanding shares of our preferred stock into 10,395,299 shares (on a post-split basis) of common stock upon completion of this offering;

•  the reclassification of all outstanding preferred stock warrants subject to redemption to common stock warrants;

•  the filing of amendments to our charter effective upon completion of this offering; and

•  our sale of           shares of common stock in this offering at an assumed initial public offering price of $           per share (the mid-point of the initial public offering price range set forth on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and offering expenses, and the application of the net proceeds from our sale of common stock in this offering.

      You should read this capitalization table together with the financial statements and related notes appearing elsewhere in this prospectus, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the other financial information included elsewhere in this prospectus.

		As of December 31, 2005
		Actual			As Adjusted
Long-term debt, excluding current portion		$	1,619,011
Preferred stock warrants subject to redemption			835,127			—
	Total indebtedness		2,454,138
Convertible participating preferred stock:
Series A, $0.01 par value: 775,000 shares authorized; 750,000 shares issued and outstanding, actual; no shares authorized, issued or outstanding, as adjusted			747,380			—
Series B, $0.01 par value: 4,500,000 shares authorized; 4,185,411 shares issued and outstanding, actual; no shares authorized, issued or outstanding, as adjusted			13,507,461			—
Series C, $0.01 par value: 9,500,000 shares authorized; 7,615,675 shares issued and outstanding, actual; no shares authorized, issued or outstanding, as adjusted			18,723,137			—
Series C-1, $0.01 par value: 2,940,000 shares authorized; 2,498,833 shares issued and outstanding, actual; no shares authorized, issued or outstanding, as adjusted			6,230,879			—
Total convertible participating preferred stock			39,208,857			—
Common stockholders’ deficit:
Undesignated preferred stock, $0.01 par value: 2,000,000 shares authorized, issued and outstanding, actual; 5,000,000 shares authorized and no shares issued or outstanding, as adjusted			—			—
Common stock, $0.01 par value: 23,500,000 shares authorized; 855,676 shares issued and outstanding, actual; 50,000,000 shares authorized and          shares issued and outstanding, as adjusted			8,557
Additional paid-in capital			3,187,885
Deferred stock-based compensation			(2,104,753	)
Accumulated deficit			(38,134,504	)
	Total common stockholders’ equity (deficit)		(37,042,815	)
	Total capitalization	$	4,620,180

      The preceding table excludes, on an as-adjusted basis, 768,680 shares of common stock issuable upon the exercise of warrants outstanding as of March 3, 2006 on an as-if converted basis and at a weighted average exercise price of $1.60 per share, 1,405,862 shares of common stock issuable upon the exercise of options outstanding as of March 3, 2006 at a weighted average exercise price of $1.09 per share, and 1,813,212 shares of common stock available for future issuance upon completion of this offering under our stock incentive plans.

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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 common stock and the adjusted net tangible book value per share of common stock immediately after this offering. Our net tangible book value as of December 31, 2005 was $(37.2) million, or $(43.46) per share of common stock. Net tangible book value per share is determined by dividing (a) our total tangible assets less our total liabilities (including convertible participating preferred stock) by (b) the number of shares of common stock outstanding.

      After giving effect to (a) the conversion of all of the outstanding shares of our preferred stock into shares of common stock upon completion of this offering, (b) conversion of preferred stock warrants into common stock warrants upon completion of this offering and (c) our sale of           shares of common stock at an assumed initial public offering price of $           per share (the mid-point of the initial public offering price range set forth on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and offering expenses, and the application of the net proceeds from such sale, our adjusted net tangible book value as of December 31, 2005 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 per share dilution:

Assumed initial public offering price per share					$
	Net tangible book value per share as of December 31, 2005	$	(43.46	)
	Effect of conversion of preferred stock into common stock
	Effect of conversion of preferred stock warrants into common stock warrants
	Increase per share attributable to new investors
Adjusted net tangible book value per share after this offering
Dilution per share to new investors					$

      If the underwriters exercise their over-allotment option to purchase additional shares in this offering, our adjusted net tangible book value at December 31, 2005 would have been $           million, or $           per share, representing 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 summarizes as of March 3, 2006, on an adjusted basis reflecting the conversion of all of the outstanding shares of our preferred stock into 10,395,299 shares (on a post-split basis) of common stock upon completion of this offering, 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 mid-point of the initial public offering price range set forth on the cover page of this prospectus) and before deducting estimated underwriting discounts and commissions and offering expenses payable by us.

		Shares Purchased					Total Consideration
												Average Price
		Number		Percent			Amount		Percent			per Share
Existing stockholders			11,251,225			%	$	39,918,048			%	$	3.55
New investors
	Total				100	%	$			100	%

      As of March 3, 2006, there were options outstanding to purchase a total of 1,405,862 shares of common stock. Those options had a weighted average exercise price of $1.09 per share. As of March 3, 2006, there were warrants outstanding to purchase on an as-if converted basis a total of 768,680 shares of common stock. Those warrants had a weighted average exercise price of $1.60 per share. To the extent any of those options or warrants are exercised, there will be further dilution to new investors.

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SELECTED FINANCIAL DATA

      The selected financial data set forth below should be read in conjunction with the financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information appearing elsewhere in this prospectus. The statement of operations data for the years ended December 31, 2003, 2004 and 2005 and the balance sheet data as of December 31, 2004 and 2005 are derived from financial statements audited by KPMG LLP, and included elsewhere in this prospectus. The historical results are not necessarily indicative of the results to be expected for any future periods.

			Year Ended December 31,
						2002			2003			2004
			2001			(Restated)			(Restated)			(Restated)			2005
Statement of operations data:
Net sales			$	—		$	—		$	368,201		$	944,816		$	4,854,235
Cost of sales				—			—			412,316			790,805			1,641,390
Gross margin (loss)				—			—			(44,115	)		154,011			3,212,845
Operating expenses:
	Research and development			3,462,035			3,346,277			3,300,904			2,281,880			1,869,264
	General and administrative			1,600,024			1,808,210			2,002,956			2,148,276			2,938,237
	Sales and marketing			344,954			229,274			2,332,716			4,039,447			4,981,024
		Total operating expenses		5,407,013			5,383,761			7,636,576			8,469,603			9,788,525
		Loss from operations		(5,407,013	)		(5,383,761	)		(7,680,691	)		(8,315,592	)		(6,575,680	)
Interest income				355,234			48,821			32,147			169,072			132,421
Interest expense				(13,823	)		(31,077	)		(2,659,735	)		(426,120	)		(24,816	)
Other income (expense), net				(300	)		3,632			629,814			1,018,413			(553,125	)
Cumulative effect of change in accounting principle				—			—			266,989			—			—
Net loss			$	(5,065,902	)	$	(5,362,385	)	$	(9,411,476	)	$	(7,554,227	)	$	(7,021,200	)
Amortization of beneficial conversion feature of Series A and B preferred stock				—			—			(44,941	)		(251,806	)		—
	Series B preferred stock deemed dividend (restated)			—			(951,208	)		—			—			—
Net loss attributable to common stockholders			$	(5,065,902	)	$	(6,313,593	)	$	(9,456,417	)	$	(7,806,033	)	$	(7,021,200	)
Net loss per share			$	(6.74	)	$	(8.39	)	$	(11.42	)	$	(6.52	)	$	(5.73	)
Basic and diluted weighted average common shares outstanding				751,125			752,678			827,819			1,196,366			1,224,350

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     In the preceding table, cost of revenue and operating expenses include stock-based compensation expense as follows:

		Year Ended December 31,
				2002		2003		2004
		2001		(Restated)		(Restated)		(Restated)		2005
Stock-based compensation expense:
Cost of sales		$	—	$	—	$	—	$	1,912	$	19,380
Research and development expense			—		—		—		2,162		14,804
General and administrative expense			59,925		34,694		—		29,295		462,983
Sales and marketing expense			—		—		—		6,114		62,417
	Total stock-based compensation expense	$	59,925	$	34,694	$	—	$	39,483	$	559,584

	As of December 31,
				2002			2003			2004
	2001			(Restated)(1)			(Restated)(1)			(Restated)(1)			2005
Balance Sheet Data:
Cash and cash equivalents	$	1,529,438		$	2,181,759		$	852,582		$	2,258,270		$	3,396,577
Working capital (deficit)		5,324,532			1,331,281			(9,375,607	)		8,322,540			4,058,376
Total assets		5,821,967			2,803,153			1,973,580			9,658,638			6,394,745
Total current liabilities		357,133			1,173,957			10,605,494			974,161			1,767,665
Total liabilities		430,487			2,344,653			10,828,246			1,068,445			4,228,703
Convertible participating preferred stock		13,303,633			14,254,858			14,003,035			39,208,857			39,208,857
Convertible participating preferred stock warrants		7,756			343,710			—			—			—
Total common stockholders’ deficit	$	(7,919,909	)	$	(14,140,072	)	$	(22,857,701	)	$	(30,618,664	)	$	(37,042,815	)

(1)  As further described in note 2 to the financial statements, we have restated our financial statements for the years 2003 and 2004. We also restated our 2002 financial statements, which are not included herein. Such adjustments included:

          (a)  accounting for an embedded derivative under SFAS No. 133, Accounting for Derivative Investments and Hedging Activities, (SFAS 133);

          (b)  correcting the accounting for preferred stock warrants subject to mandatory redemption under SFAS 150;

          (c)  correcting the accounting for stock-based compensation;

          (d)  correcting the accounting of severance amounts due to former employees;

          (e)  correcting other accounting errors related to the accrual of costs and expenses;

          (f)  correcting the classification of investments that were previously recorded as cash;

          (g)  correcting the accounting for recognition of a beneficial conversion feature;

(h)	correcting other miscellaneous items that we identified during our current evaluation of our accounting policies, none of which were significant individually or in the aggregate; and
(i)	correcting the accounting for a preferred stock dividend.

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Quarterly Results of Operations (in thousands except per share calculations)

			Year Ended December 31, 2004															Year Ended December 31, 2005
			Q1(1)			Q2(1)			Q3(1)			Q4(1)			Total(2)			Q1(1)			Q2(1)			Q3(1)			Q4(1)			Total
Net sales			$	182		$	170		$	205		$	388		$	945		$	903		$	1,162		$	1,227		$	1,562		$	4,854
Cost of sales				80			72			383			256			791			440			354			369			478			1,641
	Gross margin (loss)			102			98			(178	)		132			154			463			808			858			1,084			3,213
		Loss from operations		(1,636	)		(2,087	)		(2,436	)		(2,157	)		(8,316	)		(1,913	)		(1,702	)		(1,304	)		(1,657	)		(6,576	)
		Net loss		(713	)		(2,160	)		(2,562	)		(2,119	)		(7,554	)		(2,047	)		(1,918	)		(1,349	)		(1,707	)		(7,021	)
Amortization of beneficial conversion feature of Series A and B preferred stock				(252	)		—			—			—			(252	)		—			—			—			—			—
		Net loss attributable to common stockholders	$	(965	)	$	(2,160	)	$	(2,562	)	$	(2,119	)	$	(7,806	)	$	(2,047	)	$	(1,918	)	$	(1,349	)	$	(1,707	)	$	(7,021	)
Net loss per share			$	(0.80	)	$	(1.81	)	$	(2.14	)	$	(1.77	)	$	(6.52	)	$	(1.69	)	$	(1.55	)	$	(1.10	)	$	(1.39	)	$	(5.73	)
Basic and diluted weighted average common shares outstanding				1,195,385			1,195,385			1,195,435			1,196,366			1,196,366			1,207,211			1,225,951			1,220,557			1,224,350			1,224,350

(1)	Unaudited
(2)	Restated

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

      The following discussion and analysis should be read in conjunction with the financial statements and related notes and the other financial information appearing elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that involve risk, uncertainties and assumptions. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of many factors, including those discussed in “Risk Factors” and elsewhere in this prospectus.

Overview

      We develop, manufacture and market our proprietary Pillar System, a simple, innovative, minimally-invasive, implantable medical device to treat sleep disordered breathing, which includes OSA and snoring. During the Pillar Procedure, a physician implants three small, braided, proprietary polyester inserts into the muscle of the soft palate to stiffen it and add structural support. This stiffening minimizes or eliminates the palatal tissue vibration that can cause snoring and the collapse that can obstruct the upper airway and cause OSA. We believe the Pillar Procedure is a safe, clinically effective, long-lasting, low-risk procedure with minimal pain or complications that offers significant benefits to both patients and physicians over other available treatment options for mild to moderate OSA and snoring.

      We were incorporated in 1999 and commercially introduced our Pillar System for the treatment of snoring in April 2003 and for the treatment of mild to moderate OSA in October 2004. More than 1,000 physicians have performed collectively over 11,000 Pillar Procedures world-wide to date. Our revenues have grown from $368,201 in 2003, to $944,816 in 2004, to $4.9 million in 2005, although you should not rely on our past revenue growth as any indication of future growth rates or operating results. Currently, our only product is our Pillar System. We have, in the past, sold other devices used by ENTs to treat sleep breathing disorders, which currently do not account for a significant portion of our revenues. Geographically, approximately 70% of our 2005 revenues came from customers in the United States and 30% of our 2005 revenues came from sales to distributors in countries in Asia Pacific, Europe, the Middle East and South Africa.

      We anticipate that our cost of sales generally will increase during those quarters in which our sales increase. Our cost of sales also may increase if we incur additional manufacturing costs in anticipation of the commercial introduction of new products or introduce significant enhancements or improvements to the design of our current Pillar System. Furthermore, we expect our gross margins may decrease in those quarters in which we generate a higher percentage of our revenues from the sale of our products in international markets, or in which we initiate sales of a new product or product line.

      We market and sell our Pillar System primarily to ENTs, and to a lesser extent, oral maxillofacial surgeons. In the future, we intend to expand our marketing efforts to other physicians who treat sleep disordered breathing. We receive orders directly from physicians over the telephone and through purchase orders from physicians or distributors. Our products are manufactured and shipped from our facility in St. Paul, Minnesota to either physicians or distributors, and we invoice our customers and generally recognize revenue upon shipment.

      Generally, patients pay the entire cost for the Pillar Procedure out-of-pocket, whether the patient is being treated for OSA or snoring. The cost of treatments for OSA such as CPAP and most surgical procedures generally are reimbursed by third-party healthcare insurers, including Medicare. We have begun the process of seeking third-party reimbursement approval for the use of the Pillar Procedure to treat mild to moderate OSA, and we intend to continue pursuing third-party reimbursement. Third-party healthcare insurers typically consider any snoring treatment to be an elective cosmetic procedure, and do not cover payment for such procedures.

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We believe that all treatments for snoring, including the Pillar Procedure, will continue to be considered elective procedures, and therefore, procedures for which patients will pay out-of-pocket. We believe the number of Pillar Procedures performed to treat snoring will continue to increase, and the Pillar Procedure will remain a profitable and sustainable procedure for our physician customers. We also expect to continue to have a viable self-pay business for treating mild to moderate OSA regardless of whether or not reimbursement for the Pillar Procedure for treating OSA is obtained.

      We intend to grow our business by continuing to penetrate our existing markets, and by introducing our product to other physicians who treat sleep disordered breathing as an alternative treatment for their patients who are unable or unwilling to comply with CPAP therapy or seek a safe and clinically effective alternative. We will seek to achieve these goals by expanding our current direct sales force of 12 individuals in the United States, increasing distribution of our products internationally beyond the 12 markets where our Pillar System currently is marketed and sold and bringing new products and technologies to ENTs and oral maxillofacial surgeons.

      To date, our product development efforts have been primarily focused on improving the clinical performance and manufacturability of our Pillar System, thereby reducing the cost of producing our Pillar System. In the future, our product development initiatives will include introducing improvements and enhancements to the design and functionality of our Pillar System, designing new implantable products to treat other areas of upper airway obstruction that cause or contribute to sleep breathing disorders and introducing or distributing accessory product offerings for diagnosing or treating sleep disordered breathing.

      We entered into a five-year lease agreement in 2005 for our current manufacturing and office facilities which we believe will allow us to meet the anticipated increased demand for our products, expand our business activities and increase manufacturing efficiencies. We currently sublease space to two tenants, which partially offsets our overall facility costs, while providing additional space for future expansion.

      We have never operated as a public company. As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act, together with new rules subsequently implemented by the SEC and the Nasdaq National Market, have imposed various new requirements on public companies, including requiring certain corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these new compliance requirements. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly.

      The commercial success of our Pillar System ultimately depends upon a number of factors, including the number of physicians who perform the Pillar Procedure, the number of Pillar Procedures performed by these physicians, the number of patients who become aware of the Pillar Procedure as a treatment option, the number of patients who elect to undergo the Pillar Procedure, and the number of patients who, having successfully undergone the Pillar Procedure, endorse and refer the Pillar Procedure to other potential patients. We believe that the Pillar Procedure offers physicians a clinically-effective, economically attractive, in-office procedure to treat their patients who are afflicted with mild to moderate OSA and snoring.

      Since we commenced operations in 1999, we have incurred net losses primarily from costs relating to the development and commercialization of our Pillar System. We incurred net losses attributable to common stockholders of $9.5 million in 2003, $7.8 million in 2004 and $7.0 million in 2005. At December 31, 2005, we had an accumulated deficit of $38.1 million. We expect to significantly increase our investment in marketing and sales and research and development activities, which will be primarily funded with our currently available cash and the

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net proceeds from this offering. With our plans to continue to expand our commercialization activities, we expect to continue to incur net losses through at least 2008.

Application of Critical Accounting Policies and Use of Estimates

      Our financial statements are prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The application of GAAP requires that we make estimates that affect our reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ significantly from these estimates.

      We believe that of our significant accounting policies, which are described in Note 1 to our financial statements, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.

Revenue Recognition

      We generate revenue from the sale of our Pillar System. Revenue is generated from sales to physician customers in the US and Germany and third-party distributors internationally. We generally do not sell our Pillar System to hospitals or healthcare institutions.

      Revenue is recognized when evidence of an arrangement exists, delivery to the customer has occurred, the selling price is fixed or determinable, and collectability is reasonably assured. Revenue is generally recognized upon shipment, after the receipt of a purchase order. Sales to our international distributors are made according to the contractual terms of each individual distribution agreement, or in the case of direct sales to physician customers in Germany, net 30 days. Revenue on international sales is recognized at the time of shipment.

      The evidence of an arrangement generally consists of a purchase order issued by the customer or pursuant to a distribution agreement. For existing physician customers, the evidence of an arrangement may consist of a verbal phone order in situations in which normal business practices do not require a purchase order.

      Delivery to the customer occurs when the customer takes title to the product. Generally, title passes upon shipment from our facility, but may occur when the product is received by the customer based on the terms of the agreement with the customer.

      The price for each sale is fixed and agreed with the customer prior to shipment and is generally based on established list prices.

      A provision for estimated sales returns on domestic product sales is recorded in the same period as the related revenue is recorded. The provision for estimated sales returns, if any, is based on an analysis of historical sales returns as adjusted for specifically identified estimated changes in historical return activity. Sales terms to our international distributors do not contain a right to return product purchased from us. We have allowed only limited product returns from US physician customers and international distributors in connection with our release of a redesigned Pillar delivery system during 2005. We have a corporate policy of not accepting product returns for non-defective Pillar Systems from any customer, except in extraordinary circumstances which we review on a case-by-case basis. We will, however, provide physician customers with replacement Pillar Systems in the event a patient treated by such physician has a partial extrusion of a Pillar insert, as explained in “Guarantees and Warranties.”

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      In the US, as part of introducing our Pillar System to potential new physician customers, we offer physicians the opportunity to participate in our “practice introduction program,” or PI program, to treat up to three patients with the Pillar Procedure using Pillar Systems that we provide at no charge to the physician. The costs associated with providing these Pillar Systems to US physicians under our PI program are accounted for as a sales and marketing expense at the time of each practice introduction. During 2005, our international distributors were offered the opportunity to participate in an international PI program whereby we would provide marketing support payments for practice introductions conducted by the distributor. The support payments made to each distributor who participated in our 2005 international PI program were accounted for as a reduction of revenue to that distributor.

      Our standard payment terms for customers are net 30 to 60 days in the United States and net 30 to 120 days internationally. If we deem the facts and circumstances surrounding a customer’s order justify alternative payment terms, we may grant extended payment terms on a customer-by-customer basis.

      Collectability is evaluated prior to shipment. Our customers typically are physicians, clinics and hospitals, and are generally deemed creditworthy; however, if we have collection concerns, we will require prepayment of the order.

Allowance for Doubtful Accounts

      In estimating the collectability of our accounts receivable, we analyze historical bad debts, customer concentrations, customer credit-worthiness, current economic trends, and changes in customer payment terms. We record allowances in the period when the net revenues are recognized based on anticipated future events. If there are unanticipated future events, this allowance may need to be adjusted. On a monthly basis, we determine the amount of this reserve based on a review of slow-paying accounts, as well as accounts with changed circumstances indicating that the balance due and owing to us is unlikely to be collectible.

Guarantees and Warranties

      We replace any defective Pillar System that is returned to us at no charge to the customer provided the returned unit is not past its product expiration date (which typically is two to three years from the date of sterilization). We also will provide a replacement Pillar System at no charge to the physician customer in the event a patient treated by the physician with a Pillar Procedure experiences a partial extrusion of the Pillar insert, either at or subsequent to the time of implant. As of December 31, 2005, we maintained a reserve of $5,591 to account for this “warranty expense.” We adjust our estimated warranty expense accrual each month based on historical warranty claims experience, and record adjustments in an amount equal to the standard cost of the replacement Pillar Systems provided to physician customers. Actual warranty expense claims in the future could exceed our current warranty expense accrual if there is an increase in our historical experience of (a) defective Pillar System units given that many of the Pillar Systems sold in 2004 and all of the Pillar Systems sold in 2005 are not beyond their two to three-year product expiration date, and/or (b) the commercially reported partial extrusion rate of Pillar inserts which has been less than 1%.

Accounting for Income Taxes

      Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have recorded a full valuation allowance on our net deferred tax assets as of December 31, 2004 and 2005, respectively, due to uncertainties related to our ability to utilize our deferred tax assets in the foreseeable future. These deferred tax assets primarily consist of certain net operating loss carry forwards and research and development tax credits.

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Stock-Based Compensation

      We have granted to our employees options to purchase shares of our common stock at exercise prices equal to the fair value of the underlying common stock, as determined by our board of directors, on the date of grant. In the preparation of our consolidated financial statements, we had independent valuations of our common stock performed. Management, in making these determinations, considered a variety of quantitative and qualitative factors including (i) the fair market value of the common stock of comparable publicly traded companies; (ii) the net present value of our projected earnings as an ongoing concern; (iii) third-party transactions involving our preferred stock; (iv) liquidation preferences of our various series of preferred stock and the likelihood of conversion of the preferred stock; (v) the status and timing of our efforts to complete this offering; (vi) changes in our business operations, financial condition and results of operations over time, including cash balances and the rate of our use of cash; (vii) the status of new product development; (viii) our estimate of the range of the share prices at which our common stock would be offered to the public in this offering; and (ix) general financial market conditions. In subsequent periods and prior to the effective date of this offering, the fair value of the common stock will be determined by management based on the anticipated offering price and/or periodic third-party valuations. We anticipate that nearly all stock options granted in the future will have an exercise price determined by the closing trading price in the market on the date of grant.

      These valuations are inherently highly uncertain and subjective. If we had made different assumptions, our deferred stock-based compensation amount, our stock-based compensation expense, our net loss and net loss per share could have been significantly different.

      Under GAAP, companies are permitted to use an alternative method of valuing stock options which is based on the fair value of the stock option on the date of grant. This method generally results in the recording of a greater expense related to stock options. Recent changes to the accounting rules require all companies to use a fair value method to record compensation expense related to stock options. We are required to adopt this change in the first quarter of 2006. It is expected that the adoption of this change will have a material negative impact on future earnings.

      As of December 31, 2005, we had outstanding stock options to acquire an aggregate of 1,406,114 shares of common stock, and those stock options had an intrinsic value of $           million. The “intrinsic value” of these stock options represented the difference between the assumed initial public offering price of $           per share (the midpoint of the estimated price range set forth on the cover page of this prospectus) and the option exercise price, multiplied by the number of shares subject to the option. Of those outstanding options, (a) 615,918 shares had vested as of December 31, 2005, representing an intrinsic value of $           and (b) 790,196 were unvested, representing an intrinsic value of $          .

Long-Lived Assets

      We evaluate whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets may warrant revision, or that the remaining balance of these assets may not be recoverable. When deemed necessary, we complete this evaluation by comparing the carrying amount of the assets against the estimated undiscounted future cash flows associated with them. If such evaluations indicate that the future undiscounted cash flows of long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their estimated fair values. We assess the impairment of our manufacturing equipment at least annually, or whenever events or changes in circumstances indicate that the

30

carrying value may not be recoverable. Factors considered important which could trigger an impairment review, and potentially an impairment charge, include the following:

•  A significant decrease in the market price of a long-lived asset (asset group);

•  A significant adverse change in (i) the extent or manner in which a long-lived asset (asset group) is being used or (ii) its physical condition;

•  A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset (asset group), including an adverse action or assessment by a regulator;

•  An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset (asset group);

•  A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset group); and

•  A current expectation that, more likely than not, a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.

      We conduct an annual review of our long-lived assets to determine if any assets have no or limited future value or if the value of an asset has changed during the year. In addition, as a result of the historical losses for our business, we further analyzed the effect of our launch of a newly designed Pillar delivery system in 2005 on the carrying value of our long-lived assets. Using the accumulated information from this analysis, no material asset impairment charges were recorded. Asset impairment evaluations are, by nature, highly subjective.

Series C-1 Financing

      All series of our outstanding preferred stock are convertible at any time into common stock at the option of the holder. The conversion price of all outstanding preferred stock is subject to weighted average anti-dilution protection. During 2003, the conversion price of Series A and Series B was adjusted from $1.00 and $3.00 per share to $0.898 and $2.6571, respectively. At December 31, 2005, our Series A, Series B, Series C and Series C-1 preferred stock were convertible into 417,594, 2,362,770, 3,807,837 and 1,249,416 shares (on a post-split basis) of common stock, respectively. At December 31, 2005, the conversion price of Series A, Series B, Series C and Series C-1 was $0.898, $2.6571, $2.62 and $2.62, respectively. There were no changes in the per share conversion prices during 2005. The stockholders have approved an amendment to our certificate of incorporation to adjust the conversion price of the Series C and Series C-1 preferred stock from $2.62 to $1.74 per share, to be effective immediately prior to the conversion of all outstanding shares of our preferred stock upon completion of this offering. All series of our preferred stock and warrants for our preferred stock are mandatorily convertible into common stock upon a qualified initial public offering, as defined in our certificate of incorporation. As this offering will constitute a “qualified” initial public offering, all outstanding shares of preferred stock and warrants for preferred stock will be converted into either common stock or warrants for common stock, respectively, upon completion of this offering. As a result of the change in the conversion price of Series C and Series C-1 preferred stock, the outstanding common stock upon completion of this offering will increase by 2,649,864 shares, including 92,172 common shares issuable pursuant to the Series C-1 preferred stock warrants.

      Preferred stockholders have the same voting rights as common stockholders. Preferred stockholders have one vote for each share of common stock into which their shares of preferred stock are convertible as determined by the current conversion price. As a result of the

31

preferred stockholders’ board of directors’ representation and voting rights, they effectively control our affairs, including our liquidation. No class of preferred stock has redemption rights.

      If we issue equity or convertible instruments that are not subject to defined carve out provisions below the then applicable conversion price for each preferred stock series, the conversion price to common stock will be adjusted on a weighted average basis.

      Upon declaration by our board of directors, Series C and Series C-1 stockholders are entitled to a non-cumulative dividend of $0.21 per annum (8%) prior to the payment of dividends on Series A and Series B and common stock. After the payment of the Series C and Series C-1 dividend and prior to the payment of dividends to common stockholders, Series A and Series B stockholders are entitled to a non-cumulative dividend of $0.08 and $0.24 per annum (8% for each class), respectively. After all preferred stock dividend preferences have been paid, the common stockholders participate with preferred stockholders on an as-if converted basis.

      Series C has senior liquidation rights of $5.24 per share prior to Series C-1’s liquidation preference of $5.24 per share, and prior to the combined Series A and Series B pari passu liquidation preference of $1.00 and $3.00 per share, respectively. After all of the above liquidation preferences have been paid, any remaining liquidation proceeds are paid to common stockholders and all classes of preferred stock on an as-if converted basis. However, Series A, Series B, Series C and Series C-1 stockholders are limited to aggregate liquidation proceeds of $3.00, $9.00, $7.86 and $7.86, respectively, per share, with the remaining proceeds paid to common stockholders.

Sales to International Distributors

      We began selling Pillar Systems internationally through distributors in January 2005, and for the year ended December 31, 2005, approximately $1.4 million, or 30% of our total worldwide revenue, was generated from international sales. Because the Pillar Procedure is a relatively new clinical procedure to treat snoring and mild to moderate OSA, our distributors invest significant time and resources to develop the market for the Pillar Procedure in their respective territories, including training, marketing and selling Pillar Systems to ENT physicians who will perform the Pillar Procedure.

      Our international distribution agreements each contain provisions requiring our distributors to purchase an annual minimum number of Pillar Systems. Typically, we negotiate and include annual minimum purchase requirements for the first year of the distribution agreement, and we agree to negotiate future annual minimum purchase requirements based upon the sales results and market conditions in each individual territory.

      The time between an international distributor’s initial stocking order and subsequent re-orders of Pillar Systems, as well as the size of individual Pillar System orders, varies by territory based on a number of factors. These factors include the geographical size and economic development of a territory, the prevalence of sleep disordered breathing patients in the territory, the potential number of physicians who may be interested in performing Pillar Procedures, and the number of snoring and OSA patients who are willing to pay for the Pillar Procedure out-of-pocket as the Pillar Procedure typically is not covered by government or private medical insurance in international markets.

      During 2005, most of our distributors purchased Pillar Systems from us on a quarterly basis to minimize international freight charges and product importation fees. Seven of our international distributors made only an initial purchase of Pillar Systems pursuant to binding distribution agreements at various times during 2005, representing approximately 33% of our total international revenue during 2005. Our five other international distributors re-ordered Pillar Systems anywhere from two months to six months following their initial order, representing

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approximately 67% of our total international revenue during 2005. Pillar Systems purchased by our three largest distributors during 2005 represented approximately 75% of our total international sales for the year ended December 31, 2005. Total international sales in the last half of fiscal 2005 represented approximately 48% of total 2005 international sales, and approximately 67% of international sales in the last half of 2005 represented product re-orders from our international distributors.

      As we do not have full visibility of the levels of Pillar System inventory held by our international distributors, we rely upon each of our international distributors to manage their respective inventory levels of Pillar Systems at any particular time, including the time at which they choose to re-order Pillar Systems. However, the very nature of establishing international distribution for a new, novel medical device product may result in distributors purchasing inventory in excess of their near-term demand until more mature sales cycles are established.

      In the fourth quarter of 2005, we contractually agreed to expand the territory distribution rights for one of these distributors from nine to twelve countries. Our two largest distributors informed us that they had less than 90 days and 60 days, respectively, of Pillar System sales in their inventory at the time we shipped product to fill their fourth quarter orders. Based on our discussions with our largest distributors, as well as discussions with our other distributors, we believe the Pillar System inventories purchased by our distributors are sufficient and not in excess of the quantities required for the early stage development of the sleep disordered breathing markets in their respective territories. We do not contractually offer our international distributors the right to return Pillar Systems purchased from us, and we do not anticipate granting any special product return rights in 2006 to our international distributors for Pillar Systems purchased in 2005.

      If, in the future, any international distributor is unable to sell Pillar Systems at volumes and prices acceptable for their business, such distributor could reduce their level of future Pillar System purchases or discontinue selling Pillar Systems altogether. In the event of any such failure to sell currently held Pillar Systems, we may not receive timely payment of amounts due and owing to us. In addition, if international distributors reduce or discontinue Pillar System purchases, we could experience a reduction in our future sales revenue during the time it takes us to find a replacement distributor for the affected territory.

Results of Operations

Comparison of Years Ended December 31, 2004 and 2005

      Net Sales. Net sales increased by $3.9 million, or 414%, from $944,816 in 2004 to $4.9 million in 2005. The net sales increase in 2005 was attributable to the increased sale of our Pillar Systems, both in the United States and international markets. United States net sales increased by $2.5 million, or 265%, from $936,956 in 2004 to $3.4 million in 2005. The total number of Pillar System units sold increased by 25,877, or 471%, from 5,494 units in 2004 to 31,371 units in 2005. The number of units sold in the United States increased by 10,859 or 199%, from 5,452 units in 2004 to 16,311 units in 2005. The number of units sold internationally increased by 15,018 from 42 units in 2004 to 15,060 units in 2005. The growth in United States net sales was primarily driven by an increase in the number of direct United States sales representatives, the number of new physician customers performing Pillar Procedures and the average number of Pillar Procedures performed by our physician customers. We first began selling our Pillar System for the treatment of snoring in April 2003 and continued under that indication until October 2004 when we began selling our Pillar System under both the snoring and mild to moderate OSA indications. The United States average selling price, or ASP, for the three Pillar inserts used in each Pillar Procedure increased from $540 in 2004 to $645 in 2005 as a result of a price increase in October 2004.

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      International net sales increased from $7,860 in 2004 to $1.4 million in 2005. We commercially introduced our Pillar System into international markets beginning in January 2005 through independent third-party distributors. At the end of 2005, our Pillar System was marketed and sold in 12 international markets in Asia Pacific, Europe, the Middle East and South Africa. Generally, international ASPs for our Pillar System averaged approximately 50% of United States ASP.

      Cost of sales and gross margin. Cost of sales increased by $850,585, or 108%, from $790,805 in 2004 to $1.6 million in 2005. This increase was due to the increase in our Pillar Systems sold in 2005. As a percentage of net sales, cost of sales decreased from 84% in 2004 to 34% in 2005. As a percentage of net sales, gross margin improved from 16% in 2004 to 66% in 2005. The improvement in the gross margin percent in 2005 was the result of significant reductions in the cost of our Pillar System following our launch of a redesigned second generation delivery system in May 2005, as well as increased volume-related production efficiencies. We expect that as volume continues to increase gross margins will continue to improve as a result of economies of scale.

      Research and development expenses. Research and development expenses decreased by $412,616, or 18%, from $2.3 million in 2004 to $1.9 million in 2005. This decrease was attributable to a reduction in research and development personnel and the transfer of resources from research and development to manufacturing during 2004 and 2005 in connection with the commercialization of a redesigned Pillar delivery system. Additionally, we completed our initial series of post-market clinical studies and the publication of the results of these studies in peer-reviewed medical journals. During 2006, we expect research and development expenses will increase as new product development projects are initiated, and as we increase the number of post-market clinical studies of the Pillar Procedure.

      General and administrative expenses. General and administrative expenses increased by $789,961, or 37%, from $2.1 million in 2004 to $2.9 million in 2005. This increase was primarily attributable to increases in payroll, stock-based compensation and other benefits of $514,049 due to increased headcount, including the hiring of our new President and CEO in 2005, as well as expenses associated with the resignation of his predecessor. The remaining increase in general and administrative expenses included recruiting costs associated with hiring our new President and CEO, consulting expenses relating to upgrading our financial reporting and operating information systems, and an increase in bad debt expense associated with our significant increase in sales during 2005. As a percentage of net sales, general and administrative expenses decreased from 227% in 2004 to 61% in 2005. The decrease as a percentage of net sales was mainly due to the rapid expansion of sales without the need for a proportional increase in staff. We expect general and administrative expenses will increase in 2006 due to the costs of being a public company, which may include the use of more consultants and increased staff.

      Sales and marketing expenses. Sales and marketing expenses increased by $941,577, or 23%, from $4.0 million in 2004 to $5.0 million in 2005. This increase was primarily attributable to increased payroll and other benefit expenses for additional sales and marketing personnel. We also incurred $227,983 of increased expenses associated with initiating our efforts to obtain a reimbursement code and coverage policies for the Pillar Procedure from the United States government and private third-party health insurers in 2005. However, this increased spending on reimbursement was offset by a reduction in other marketing expenses of $229,748, primarily related to expenses incurred in 2004 for the initial design, development and production of marketing materials and programs to commercially launch the FDA clearance of the mild to moderate OSA indication for the Pillar Procedure. As a percentage of net sales, sales and marketing expenses were 428% in 2004, compared to 103% in 2005. The decrease in sales and marketing expenses as a percentage of net sales was due to the significant

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increase in sales generated by the expanded sales and marketing programs. We expect sales and marketing spending will increase in 2006, but decrease as a percentage of net sales.

      Interest income. Interest income declined by $36,651, or 22%, from $169,072 in 2004 to $132,421 in 2005. This decrease was attributable to a decline in the amounts invested in short term investments purchased with the funds received from the sale of Series C and Series C-1 preferred stock during 2004. Over the next year, we anticipate interest income will increase due to the increase in short term investments using the proceeds from this offering.

      Interest expense. Interest expense decreased by $401,304, or 94%, from $426,120 in 2004 to $24,816 in 2005. This decrease was due to all of our debt either being converted into Series C-1 preferred stock or repaid in 2004 and no further debt being assumed until December 2005.

      Other income (expense). Other income (expense) decreased by $1.6 million, or 154%, from $1.0 million of income in 2004 to $553,125 of expense in 2005. This decrease was primarily due to the conversion of the 2003 bridge loans into Series C-1 preferred stock, resulting in a gain of $870,692 in 2004 from the extinguishment of an embedded derivative upon conversion. In addition, in 2004, we recognized a benefit of $128,465 related to the change in fair value of our preferred stock warrants subject to redemption compared to expense of $572,023 in 2005 for this change in fair value.

Comparison of Years Ended December 31, 2003 and 2004

      Net sales. Net sales increased by $576,615, or 157%, from $368,201 in 2003 to $944,816 in 2004. The total number of Pillar System units sold increased by 3,560, or 184%, from 1,934 units in 2003 to 5,494 units in 2004. The number of units sold in the United States increased by 3,518, or 182%, from 1,934 units in 2003 to 5,452 units in 2004. No units were sold internationally in 2003 as compared to 42 units in 2004. Our net sales growth in 2004 was primarily driven by an increase in the number of new physician customers performing Pillar Procedures and the average number of Pillar Procedures performed by our physician customers. We first began to market and sell our Pillar System for the treatment of snoring in April 2003 and continued selling our Pillar System solely under the snoring indication until October 2004, when we also began to market and sell our Pillar System for mild to moderate OSA indications. The number of direct United States sales representatives remained unchanged between 2003 and 2004. The United States ASP for the three Pillar Systems used in each Pillar Procedure decreased from $570 in 2003 to $540 in 2004, reflecting an increase in the number of customers placing larger orders and receiving volume-based pricing discounts.

      Cost of sales and gross margin (loss). Cost of sales increased by $378,489, or 92%, from $412,316 in 2003 to $790,805 in 2004. This increase in cost of sales was due to a higher number of our Pillar Systems sold in 2004, higher inventory reserves and product liability insurance costs, offset by reduced costs from volume-related production savings. As a percentage of net sales, cost of sales decreased from 112% in 2003 to 84% in 2004. As a percentage of net sales, gross margin (loss) improved from (12)% in 2003 to 16% in 2004. The improvement in gross margin was driven by increased Pillar System sales and increased volume-related production efficiencies.

      Research and development expenses. Research and development expenses decreased by $1.0 million, or 31%, from $3.3 million in 2003 to $2.3 million in 2004. This decrease was primarily attributable to $992,188 of our Pillar System product development costs incurred in 2003, and the decision to suspend research and development work on future products in 2004.

      General and administrative expenses. General and administrative expenses increased by $145,320, from $2.0 million in 2003 to $2.1 million in 2004. This increase was primarily related to an increase in payroll, benefits and recruiting costs of $367,904 due to increased

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headcount, including the hiring of a vice president of finance in 2004. The increased headcount was offset by a decrease in consulting expenses of $258,332 as consultants were replaced with these new full-time employees in 2004. As a percentage of net sales, general and administrative expenses decreased from 544% in 2003 to 227% in 2004. The decrease in general and administrative expenses as a percentage of net sales was mainly due to the rapid expansion of sales without the need for a proportionate increase in staff.

      Sales and marketing expenses. Sales and marketing expenses increased by $1.7 million, or 73%, from $2.3 million in 2003 to $4.0 million in 2004. This increase was primarily attributable to $414,946 of increased payroll expenses related to the separation and replacement of sales management personnel and the addition of marketing personnel, increased commissions of $325,309 on higher sales volumes, and increased advertising and promotional spending and professional services. In 2004, we also initiated private third-party healthcare insurer and Medicare reimbursement strategies resulting in $109,374 in expenses in 2004 compared to $0 in 2003. As a percentage of net sales, sales and marketing expenses were 634% in 2003 compared to 428% in 2004. The decrease in sales and marketing expenses as a percentage of net sales was primarily due to the significant increase in sales generated by our 2004 expanded sales and marketing programs.

      Interest income. Interest income increased by $136,925, or 426%, from $32,147 in 2003 to $169,072 in 2004. This increase was attributable to an increase in short-term investments purchased with the funds received from the sale of Series C preferred stock during 2004.

      Interest expense. Interest expense decreased by $2.2 million, or 84%, to $426,120 in 2004 from $2.7 million in 2003. This decrease was primarily due to the $1.5 million of interest expense incurred in 2003 related to the convertible bridge loans to us from nine individuals and entities, including MPM Capital and Mark B. Knudson. The terms of these 2003 convertible bridge loans included a liquidation preference which we determined to be an embedded derivative. The estimated fair value of the embedded derivative was $1.5 million, which was recorded as a discount in the bridge loans and accreted to interest expense in 2003.

      Interest expense on the convertible bridge loans decreased by $434,570, or 76%, to $140,184 from $574,754. In the first quarter of 2004, the 2003 convertible bridge loans were converted into Series C-1 preferred stock, and we also retired a loan from Comerica Bank in the third quarter of 2004. The remaining change in interest expense of $289,846 related to the impact of modifications to the bridge loans in 2003.

      Other income (expense). Other income increased by $388,599, or 62%, to $1.0 million in 2004 as compared to $629,814 in 2003. The change primarily relates to a $232,184 increase in the put option gain on the 2003 bridge loan embedded derivative and an increase in the gain on preferred stock warrants of $119,187. We recorded a gain of $683,508 in 2003 due to a change in the estimated fair market value of the embedded put option. We recognized a gain of $870,692 in 2004 for the remaining carrying value of the embedded put option due to the extinguishment of the embedded derivative in 2004 upon converting the 2003 convertible bridge loan to Series C-1 preferred stock.

Liquidity and Capital Resources

      Since our inception we have funded our operations primarily through issuances of convertible preferred stock and related warrants, which provided us with aggregate gross proceeds of $39.9 million.

      As of December 31, 2005, we had total cash, cash equivalents and marketable securities of $3.6 million. Based upon the anticipated working capital requirements, we will be required to raise capital to maintain operations at current and anticipated levels through 2006. During the first quarter of 2006, we will initiate efforts to raise up to $50 million to finance current

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operations and provide for general corporate purposes, including expanding domestic and international marketing and sales organizations and programs, increasing product development efforts and increasing our clinical study initiatives. Our future capital requirements will depend upon a number of factors, including, but not limited to the amount of cash generated by operations, competitive and technological developments and the rate of growth of the business. Although we have been successful in raising funds in the past, there is no assurance that any such financings or borrowings can be obtained in the future on terms acceptable to us. We believe cash, cash equivalents, investments and cash provided by operating activities, together with the term debt facility, described below, will be sufficient to fund working capital and capital resource needs through at least 2006, if reductions are made to our expansion plans for sales and marketing programs and limitations are made to product development and clinical study initiatives.

      Net cash used in operating activities was $6.6 million during 2005. During 2004, cash used in operating activities was $8.3 million as compared to $7.5 million of cash used during 2003. Cash used in operating activities has historically resulted from operating losses and net increases in accounts receivable and inventories resulting from the growth of our business.

      Net cash provided by investing activities was $5.7 million during 2005, primarily related to the proceeds from sales of marketable securities. During 2004, cash used in investing activities was $6.3 million as compared to $184,453 used during 2003, primarily related to the purchase of marketable securities with a portion of the proceeds from the sale of preferred stock. Additionally, we purchased capital equipment of $208,328, $159,895 and $197,916 during 2005, 2004 and 2003, respectively.

      Net cash provided by financing activities was $2.0 million during 2005, as compared to net cash provided by financing activities during 2004 of $16.1 million, primarily consisting of net proceeds from the issuance of Series C preferred stock of $18.6 million and proceeds of $5,587 from the exercise of stock options, as compared to $6.4 million provided during 2003 resulting from the sale of preferred stock.

      In March 2005, we entered into a term debt loan agreement with a maximum principal draw-down of $5.0 million, which was amended on March 3, 2006 to provide for a maximum principal draw-down of $8.0 million. We accessed $2.0 million in December 2005 and an additional $1.0 million in February 2006. We anticipate that we will draw an additional $2.0 million by March 31, 2006 and are able to draw the remaining $3.0 million any time prior to June 30, 2006. In March 2005, we issued an initial warrant to purchase 95,420 shares of Series C-1 preferred stock, which represented 5% of the initial loan amount of $5.0 million. We are required to issue additional warrants to purchase that number of shares of Series C-1 preferred stock equal to 4% of the amount of each draw up to $5.0 million. In connection with the term debt loan amendment on March 3, 2006, we issued an additional warrant to purchase 103,053 shares of Series C-1 preferred stock. All Series C-1 preferred stock warrants will convert into warrants for common stock upon completion of this offering. Interest on the loan accrues at a variable rate of prime plus 3% and is payable monthly, with principal due at the maturity date of December 31, 2008 and an additional final payment in an amount equal to 5% of the original loan principal. The term debt loan is collateralized by substantially all of our assets, provided that the security interest in our intellectual property will be released upon completion of this offering, or in the event this offering does not occur, upon the closing of at least $10.0 million of additional preferred equity. As of December 31, 2005, we were in compliance with all of the financial and other covenants contained in the term debt loan agreement.

      In the normal course of our business, some of our domestic customers and many of our international distributors paid us after their scheduled payment due date. In addition, we allowed certain of our domestic customers and international distributors to extend the time of payment

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beyond their scheduled payment due date, or to make periodic partial payments of past-due amounts owing to us. We expect the source of a significant portion of the cash necessary to fund the continued growth of our business will be cash generated from our operations, which will require the timely payment of amounts due and owing to us from our US customers, as well as our international distributors.

      To the extent that funds generated by this public offering, together with existing cash and marketable securities, cash from operations and funds available under our term debt loan, are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. Although we are currently not a party to any agreement or letter of intent with respect to potential investments in, or acquisitions of, complementary businesses, services or technologies, we may enter into these types of arrangements in the future, which could also require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.

Disclosures about Contractual Obligations and Commercial Commitments

      The following table aggregates all contractual commitments and commercial obligations that affect our financial condition and liquidity position at December 31, 2005.

	Payments Due by Period
			Less than
Contractual Obligations	Total		1 Year		1-3 Years		4-5 Years		After 5 Years
Term debt facility	$	2,000,000	$	354,376	$	1,645,624	$	—	$	—
Capital lease obligations		23,602		5,511		18,091		—		—
Operating leases		1,796,889		371,581		1,127,883		297,425		—
Deposit payable		5,000		—		5,000		—		—
Total contractual cash obligations	$	3,825,491	$	731,468	$	2,796,598	$	297,425	$	—

Off-Balance-Sheet Arrangements

      As of December 31, 2005, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K of the SEC.

Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Exchange Risk

      In future periods, we believe a greater portion of our revenues could be denominated in currencies other than the United States dollar, thereby increasing our exposure to exchange rate gains and losses on non-United States currency transactions. Historically, our only foreign denominated payments were for clinical expenditures. Foreign currency gains and losses associated with these expenditures have not been significant. We do not currently enter into forward exchange contracts to hedge exposure denominated in foreign currencies or any other derivative financial instruments for trading or speculative purposes. In the future, if we believe an increase in our currency exposure merits further review, we may consider entering into transactions to help mitigate that risk.

Interest Rate Risk

      Our cash is invested in bank deposits and money market funds denominated in United States dollars. The carrying value of these cash equivalents approximates fair market value. Our investments in marketable securities are subject to interest rate risk and our financial condition and results of operations could be adversely affected due to movements in interest rates. In

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addition, our term debt facility is subject to a variable interest rate and we would be subject to a higher interest rate if interest rates rise. For each 1% increase or decrease in the variable rate, our interest expense would change approximately $20,000.

Recent Accounting Pronouncements

      In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123(R), Share Based Payment (SFAS 123(R)). Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS No. 123, Accounting for Stock Based Compensation. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair value. Pro forma disclosure is no longer an alternative. SFAS 123(R) must be adopted no later than annual periods beginning after December 15, 2005. We adopted SFAS 123(R) on January 1, 2006 using the modified prospective method. Under the modified prospective method, compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date.

      The adoption of SFAS 123(R) will have a significant impact on our results of operations, although it will have no impact on our overall financial position. The impact of adopting SFAS 123(R) on future period earnings cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, it is expected to have a material negative impact on future earnings. In addition, the impact of the adoption of SFAS 123(R) cannot be estimated based on the pro forma disclosures described in note 1(n) to the financial statements as we applied the minimum value method to historical periods, which is not allowed under SFAS 123(R).

      In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS 150), to address how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. We adopted SFAS 150 as of July 1, 2003. The provisions of SFAS 150 resulted in the classification of our preferred stock warrants as liabilities. Upon adoption of SFAS 150, we recognized a benefit of $266,989, as a cumulative effect of a change in accounting principle to record the preferred stock warrants at their estimated fair value. Future changes in the fair value of the preferred stock warrants will result in charges or benefits to our results of operations and will be included as a component of other income (expense).

      In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4 (SFAS 151). SFAS 151 amends the guidance in Accounting Research Board (ARB) 43, Chapter 4, Inventory Pricing, (ARB 43) to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and spoilage. SFAS 151 requires those items be recognized as current period charges regardless of whether they meet the criterion of so abnormal which was the criterion specified in ARB 43. In addition, SFAS 151 requires that allocation of fixed production overhead to the cost of production be based on normal capacity of the production facilities. We adopted SFAS 151 effective January 1, 2004. The adoption of SFAS 151 did not have a significant effect on our financial statements.

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      In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections — A Replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS 154). SFAS 154 replaces Accounting Principles Board (APB) Opinion 20, Accounting Changes (APB 20) and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. APB 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. SFAS 154 requires retrospective application to prior periods’ financial statements for voluntary changes in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The impact of SFAS 154 will depend on the accounting change, if any, in a future period.

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BUSINESS

Overview

      We develop, manufacture and market our proprietary and patented Pillar palatal implant system, or our Pillar System, a simple, innovative, minimally-invasive, implantable medical device used to treat individuals suffering from mild to moderate OSA and habitual or socially disruptive snoring. During the Pillar Procedure, a physician implants three small, braided, proprietary polyester inserts into the muscle of the soft palate using a specialized delivery tool for each palatal insert. The Pillar inserts stiffen and add structural support to the soft palate, thereby reducing the palatal tissue vibration that can cause snoring, and preventing or minimizing the soft palate tissue collapse and the resulting obstruction of the upper airway that can cause OSA. We believe the Pillar Procedure is a safe, clinically effective, long-lasting, low-risk procedure with minimal pain or complications that offers significant benefits to both patients and physicians over other available treatment options.

      As reported in the April 2004 Journal of the American Medical Association, it is estimated that one in five adults, or approximately 44 million people, in the United States suffers from mild OSA, and that one in 15 adults, or approximately 15 million people, in the United States suffers from moderate or more severe OSA. Internationally, the aggregate number of people with OSA is estimated to exceed that in the United States, including approximately 20 million people in Western Europe, 57 million people in China, and 47 million people in India. OSA is a potentially harmful breathing condition caused by one or more obstructions of the upper airway during sleep. Individuals suffering from OSA experience frequent interruptions during sleep, resulting in excessive daytime sleepiness that can lead to memory loss, lack of concentration, depression and irritability. OSA also has been linked to more severe health consequences, including increased risks of cardiovascular morbidity, high blood pressure, stroke, heart attack and Type II diabetes.

      The most common non-surgical method of treating OSA is continuous positive airway pressure, or CPAP, which is a life-long therapy that requires patients to wear a nasal or facial mask connected to a portable airflow generator while sleeping. Although effective if used continuously every night, CPAP causes significant lifestyle changes for patients and can be inconvenient and uncomfortable, resulting in a reported long-term non-compliance rate of more than 50%. Surgical treatments for OSA include the permanent removal or destruction of the tissue of the soft palate. Not only are such invasive treatments painful, but also they often are clinically ineffective, require multiple treatments and may offer only a short-term solution. The Pillar Procedure is designed to provide a permanent solution that does not require the nightly wearing of a nasal or facial mask or involve the pain and short-term nature of other available palatal surgical techniques. The Pillar Procedure typically is performed in the physician’s office in approximately 20 minutes, requires only topical and local anesthetics and does not involve the permanent surgical removal or destruction of any palatal tissue.

      In a separate report, the AAO estimates that one in four adults, or 55 million people, in the United States suffers from habitual snoring. Because most people who have OSA snore, the number of people with OSA overlaps significantly with the number of people who snore. Snoring often significantly affects the harmony and relationship between the individual who snores and his or her bed partner, often causing daytime sleepiness and irritability for both. The noisy sounds of snoring occur when air flows across the tissues of the nasal airway and the upper airway at the back of the mouth and throat, or soft palate, causing these tissues to vibrate. The Pillar Procedure is designed to stiffen and add structural support to the soft palate, thereby eliminating those vibrations and the snoring sound.

      We currently market and sell our Pillar System to otolaryngologists, or ENTs, and to a limited number of oral maxillofacial surgeons, as a minimally-invasive, clinically-effective treatment for mild to moderate OSA and snoring. Our Pillar System has been cleared by both

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the FDA and the European Commission for treatment of mild to moderate OSA and snoring. To date, over 11,000 Pillar Procedures have been performed world-wide with a reported commercial complication rate of less than 1%. Our goal is to have the Pillar Procedure recognized as the preferred first-line palatal surgical treatment for patients suffering from mild to moderate OSA and snoring. We also intend to establish the Pillar Procedure as the preferred alternative treatment for individuals who are unable or unwilling to comply with CPAP therapy or who seek a safe and clinically effective alternative to CPAP therapy for reasons of lifestyle flexibility and convenience.

      We were incorporated in Minnesota in November 1999 and reincorporated in Delaware in May 2004. Our principal executive offices are located at 2800 Patton Road, St. Paul, Minnesota 55113 and our telephone number is (651) 634-3111. Our website address is www.restoremedical.com.

Industry Background

      According to a report published in the April 2004 Journal of the American Medical Association, approximately 44 million people in the United States suffer from mild OSA and approximately 15 million people suffer from moderate or more severe OSA. In a separate report, the AAO estimates that approximately 55 million people suffer from habitual snoring. Because most people who have OSA snore, the number of people with OSA overlaps significantly with the number of people who snore.

      Awareness of sleep breathing disorders and the negative health consequences associated with both OSA and snoring has been increasing in recent years among both physicians and patients. The negative health consequences of sleep disordered breathing add an estimated $15 billion to the national healthcare bill annually.

Obstructive Sleep Apnea

      OSA is a serious, potentially life-threatening condition that is far more common than generally understood. OSA occurs in all age groups and both genders. Recent studies have linked OSA with increased risks of cardiovascular morbidity, high blood pressure, stroke, heart attack, Type II diabetes and depression. OSA typically causes excessive daytime sleepiness, resulting in memory loss, lack of concentration, slower reaction time that can cause difficulty driving or operating equipment and sexual dysfunction, such as impotence and reduced libido.

      OSA occurs when air flow into or out of the nose or mouth during sleep is obstructed due to excess or relaxed tissue that collapses and blocks the upper airway with the effort of inhalation. When the airway becomes blocked, the brain detects a drop in blood oxygen content, causing the individual to waken just enough to tighten the airway muscles and allow normal breathing to resume. People with OSA may experience sleep disruptions several hundred times in one night, in many cases without being aware that they are waking up, thereby losing the ability to have the deep, restful sleep that is critical to good health. For most people, the soft palate and base of the tongue are primary contributors to upper airway obstruction, although blockages in the nasal airway and walls of the throat, including the tonsils, also affect significant numbers of people. Ingestion of alcohol or sleeping pills can increase the frequency and duration of breathing pauses in people with OSA. Obesity also can be a contributing factor to OSA when excessive amounts of tissue narrow or obstruct the upper airway, as can decreased muscle tone as a result of aging.

      Symptoms of OSA include loud, frequent snoring, periodically gasping for breath or ceasing to breathe during sleep, and excessive daytime sleepiness and fatigue. Not everyone who snores has OSA, and not everyone with OSA necessarily snores, although most do. Primary care physicians often fail to recognize OSA because signs of this sleep disorder can be missed or ascribed to other conditions, such as depression, thyroid problems, anemia or insomnia.

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      In addition to primary care physicians, ENTs, pulmonologists, neurologists, or other physicians who have specialized training in sleep disordered breathing may diagnose and prescribe treatment for OSA. Diagnosis of the cause of OSA is complicated because there can be many different reasons for disturbed sleep as well as multiple areas of upper airway obstruction that contribute to OSA. While there are several tests available to accurately diagnose the presence of OSA, a sleep test, or polysomnography, often is required to determine its severity. Sleep tests are most commonly administered in sleep labs and require an overnight stay. Although home sleep studies can be prescribed by a physician and self-administered by patients, these studies typically are not covered by health insurance.

      The specific therapy recommended to treat OSA is tailored to the individual patient based on medical history, physical examination and the results of sleep tests. In addition to recommended lifestyle changes, treatment options for OSA traditionally have been limited to mechanical therapies or the surgical removal or scarring of tissue.

Mechanical Therapies

      The most frequently prescribed and most common treatment for OSA is continuous positive airway pressure, or CPAP. CPAP therapy requires the patient to wear a nasal or facial mask during sleep that is connected by a tube to a portable airflow generator which delivers air at a predetermined continuous positive pressure. The continuous positive pressure forces air through the nasal passages and opens the back of the throat, acting as a pneumatic stent to keep the upper airway open and unobstructed during sleep. CPAP prevents upper airway closure while in use, but apnea or hypopnea episodes return when CPAP is stopped or used improperly. CPAP is not a cure for OSA, but a life-long therapy for managing OSA that must be used on a nightly basis. Non-compliance rates for CPAP are estimated to exceed 50% due to factors such as physical discomfort and claustrophobia resulting from use of the nasal or facial mask, nasal and facial irritation, uncomfortable sleeping positions, lifestyle changes, social factors and inconvenience. The reimbursed costs of the portable airflow generator and accessories required for CPAP therapy in the first year of use range from $1,200 to $2,500. The accessories, including hoses, masks and filters, must be periodically replaced at an annual reimbursed cost of approximately $350 to $500.

      Another mechanical therapy prescribed to treat OSA is a custom-fitted or prefabricated orthodontic-like device, or oral appliance, that is worn while sleeping. An oral appliance attempts to reposition the jaw and/or the base of the tongue to prevent the tongue from collapsing and obstructing the upper airway during sleep. Oral appliances typically are prescribed and fitted by a dentist or orthodontist, the vast majority of whom are not trained or certified in sleep medicine and who may prescribe oral appliances without the clinical experience or knowledge necessary to accurately diagnose OSA or the site(s) of obstruction causing OSA or snoring in their patients. While oral appliances can be helpful to those patients whose OSA is primarily the result of collapse of the base of the tongue, they have not been proven to be effective for treating the palatal collapse or flutter addressed by our Pillar System. Oral appliances often are very uncomfortable and inconvenient, and many patients are unable to comply with the requirement of nightly life-long use. Periodic visits to adjust the appliance and dental rehabilitation are often required. The cost of oral appliances is not typically covered by third-party healthcare insurers, and the cost to patients can range between $500 and $2,000.

Surgical Procedures

      Before the Pillar Procedure, the only options for palatal-based OSA patients who were not able to tolerate or comply with CPAP therapy were aggressive interventional palatal surgical procedures that permanently remove or scar tissue. Although there are several interventional procedures used to remove or destroy soft palate tissue that can cause upper airway obstructions, none of these surgical procedures is completely successful or without risks. The

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more invasive of these palatal surgical procedures are very painful, usually require post-procedure prescription narcotics to manage the pain, often result in potentially serious post-surgical complications which can involve hospital re-admission, usually result in lengthy recovery periods of up to two weeks, and are expensive to administer. Interventional procedures to scar or stiffen soft palate tissue often involve more than one treatment, and the scarring or stiffening that results from these procedures diminishes over time as scar tissue tends to remodel and lose stiffness. Other extremely aggressive surgical procedures to treat OSA include a variety of procedures intended to improve air flow through the back of the throat, such as procedures that detach and reattach soft tissues in the throat, advance the anchor point of a key tongue muscle, and advance and realign the upper and lower jaws.

      Uvulopalatopharyngoplasty, or UPPP, currently the most common palatal surgical treatment for both OSA and snoring, uses a scalpel, electrocautery, coblation or other cutting technology to remove excess tissue at the back of the throat (tonsils, uvula, and part of the soft palate) under general anesthesia. The UPPP procedure is very painful, often requires an overnight hospital stay, sometimes requires hospital readmission to resolve complications, and typically involves a lengthy recovery period of up to two weeks. An analysis published in February 1996 with the approval of the American Sleep Disorders Association, or ASDA, of 19 clinical studies including 337 patients who underwent a UPPP procedure to treat their OSA reported the clinical measure of improvement in the level of the patients’ sleep disturbances at 40.7%. In a separate analysis published in January 2005 by the American Laryngological, Rhinological and Otological Society, or ALROS, of the early complications experienced by 1,004 patients who underwent a UPPP, the post-surgical complication rate ranged from 3.4% to 19.4%, including severe complications such as post-operative pulmonary embolism, respiratory complications, hemorrhaging and cardiovascular events. Although the incidence of long-term complications of the UPPP procedure is unclear, the most commonly reported long-term side effects include velopharyngeal insufficiency (a poor seal between the pharynx and soft palate causing a regurgitation of food and fluids when swallowing and adversely affecting speech), nasopharyngeal stenosis (a narrowing of the upper airway above the soft palate), and voice change. It is also difficult to predict which patients will experience good clinical results following this procedure. The UPPP procedure generally is covered by third-party healthcare insurers after a patient has been unable to comply with CPAP therapy. The average reimbursed cost of a UPPP procedure ranges from $3,100 to $6,800, depending upon the geographic region in which the procedure takes place. If paid for out-of-pocket, the average cost of a UPPP procedure to the patient ranges from $9,600 to $16,400, depending upon the geographic region in which the procedure takes place and length of stay. Complications could result in additional costs.

      Laser-assisted uvulopalatoplasty, or LAUP, is similar to UPPP but uses heat from a laser to destroy tissue of the soft palate. The LAUP procedure requires the use of expensive laser capital equipment and often involves multiple treatments. The clinical and economic benefits of using LAUP over UPPP have not been well established and, as a result, LAUP procedures are now performed less frequently. LAUP procedures are typically performed as an outpatient procedure or in the physician’s office, and generally are not reimbursed by third-party healthcare insurers. The total out-of-pocket cost to the patient ranges from approximately $1,500 to $3,000, and multiple procedures may be required.

      Radiofrequency ablation, or RF ablation, is a procedure that uses high frequency radio waves to stiffen the soft palate tissue through scarring, and/or reduce the volume of excess nasal turbinate and/or base of tongue tissue. RF ablation typically requires more than one treatment in separate visits to the physician for adequate results. RF ablation can be painful and uncomfortable, and the clinical effect of scarring the soft palate through ablation often is not permanent because the scar tissue tends to remodel over time and lose stiffness. RF ablation is most often performed as an in-office procedure and is generally not reimbursed by third-party healthcare insurers. FDA clearance for use of RF ablation to treat OSA is currently limited to

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base of tongue procedures. The total out-of-pocket cost to the patient ranges from $1,500 to $3,000, and often requires two or three treatments per site of obstruction.

Snoring

      Habitual and socially disruptive snoring affects both the individual who snores and his or her bed partner, often causing daytime sleepiness and irritability for both. The average non-snoring bed partner loses approximately an hour of sleep each night as a result of his or her partner’s snoring. Additionally, a recent survey of 1,008 adults determined that where one partner is a heavy snorer, 31% of the couples surveyed adjust their sleeping habits by sleeping apart, altering their sleep schedules or wearing ear plugs while sleeping.

      The noisy sounds of snoring occur when air flows across the upper airway tissues of the nose, back of the mouth or throat (soft palate), causing relaxed or unstable tissue to vibrate. Although vibration of other parts of the upper airway may contribute to snoring, the soft palate is estimated to be a contributing factor to snoring in 90% or more of patients.

      The diagnosis of snoring typically involves a consultation among the patient, his or her bed partner and the patient’s primary physician, along with a physical examination of the patient’s upper airway. The treating physician often is an ENT or other physician specializing in sleep disordered breathing. The physician typically discusses treatment alternatives with both the patient and his or her bed partner, because in many cases the bed partner is most affected by the patient’s snoring.

      Historically, the treatment options for snoring have been limited. Typically, the only options available to patients have been lifestyle changes such as weight loss or sleeping position adjustment; unproven and clinically ineffective over-the-counter remedies such as nasal strips; oral appliances, which frequently are ineffective; expensive, invasive and painful surgical procedures such as UPPP or LAUP; or less-invasive procedures such as RF ablation or sclerotherapy which have not demonstrated long-term clinical efficacy.

      Sclerotherapy is a procedure where a small amount of a sclerosing agent is injected into the soft palate and uvula. The sclerosing agent causes scarring via an inflammatory tissue response, which results in the shrinking and stiffening of tissue. Patients frequently must undergo multiple treatments to achieve the desired stiffening of the tissue. As with RF ablation, the results of sclerotherapy often are temporary as scar tissue tends to remodel over time and lose stiffness. Sclerotherapy treatments are performed in the physician’s office and generally are not reimbursed by third-party healthcare insurers. The out-of-pocket price range of a single sclerotherapy procedure to the patient is approximately $350 to $500, and ongoing treatments are required.

      All procedures or devices to treat snoring are viewed by third-party healthcare insurers as elective or cosmetic procedures, and are not reimbursed in the absence of a definitive diagnosis of OSA. The patient’s out-of-pocket costs for these procedures can range from several hundred dollars for each sclerotherapy treatment to multiple thousands of dollars for a UPPP procedure. Although CPAP also may be offered as a therapy for habitual snoring, the costs are not reimbursable, and it is not commonly prescribed.

Our Solution — The Pillar Procedure

      We believe the Pillar Procedure offers the following significant advantages over other current treatment options:

•  Clinically effective, long-lasting treatment. In multiple clinical studies, the Pillar Procedure has demonstrated comparable or superior clinical outcomes compared to invasive palatal surgical procedures that involve the permanent removal or destruction of tissue. Our procedure has long-lasting clinical benefits, whereas the clinical benefits of surgical

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	procedures that ablate and destroy palatal tissue often diminish over time as scar tissue tends to remodel and lose its stiffness.
•	Low-risk procedure with minimal pain, complications and inconvenience. The Pillar Procedure involves minimal pain and has a reported commercial complication rate of less than 1% with few post-procedure side effects. Invasive surgical procedures, such as a UPPP, that permanently remove soft palate tissue are painful, involve recovery periods of up to two weeks and have reported substantially higher complication rates of 3.4% to 19.4%. For frustrated CPAP users with mild to moderate OSA, our procedure offers a one-time, permanent treatment alternative that alleviates the nightly burden of wearing an obstructive mask.
•	Uses local anesthetic, not general anesthesia. Physicians use only topical and local anesthetics to perform the Pillar Procedure, rather than the general anesthesia required for more invasive surgical procedures, resulting in fewer complications and a significantly shorter recovery period.
•	In-office procedure that takes approximately 20 minutes. The Pillar Procedure is a one-time procedure that typically is performed in the physician’s office. Patients can resume their normal diet and activities the same day without the need for an overnight hospital stay. Invasive surgical procedures often entail a recovery period of up to two weeks. Other surgical procedures that scar or ablate tissue usually require multiple treatments involving repeat visits to the physician.
•	Economic benefits to patients, physicians and payors. For patients, the Pillar Procedure is a relatively low-cost, one-time treatment solution with no recurring expenses. For physicians, our quick, easy-to-learn procedure can be a profitable practice alternative to more invasive and risky procedures with higher complication rates or procedures which have not demonstrated long-term clinical benefits. For patients and payors, our procedure combines quality outcomes with reasonable costs.

      The Pillar Procedure was cleared by the FDA for snoring in December 2002 and for mild to moderate OSA in July 2004. Our Pillar System also received CE Mark certification from the European Commission for mild to moderate OSA in December 2004 and snoring in May 2003. More than 1,000 physicians have performed collectively over 11,000 Pillar Procedures world-wide to date.

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THE PILLAR PROCEDURE COMPARED TO OTHER COMMON TREATMENTS

					RF
	Pillar	CPAP	LAUP	UPPP	Ablation	Sclerotherapy
PATIENT EXPERIENCE
Pain or discomfort	Low	Medium	Very High	Very High	Low	Medium
Potential side-effect, most reported complication	Partial Extrusion (<1%) (1)	Nocturnal awakenings (46%), nasal congestion and dryness (44%)	Transient VPI (2) (27%)	Transient VPI (2) (20%+)	Mucosal ulceration and breakdown (22%)	Mucosal ulceration and breakdown (22%)
Sedation	Local	None	Local/General	General	Local	Local
Recovery time	24 hours or less	None	7 days	Up to 2 weeks	24 hours or less	24 hours or less
Reversible treatment	Yes	Yes	No	No	No	No
Reimbursement (OSA)	In process	Yes	No	Yes	No	No
FDA CLEARANCE
OSA	Yes	Yes	N/A(3)	N/A(3)	No(4)	No
Snoring	Yes	No	N/A(3)	N/A(3)	Yes	Yes
PHYSICIAN EXPERIENCE
Physician specialist	ENT	Pulmonologist	ENT	ENT	ENT	ENT
Patient visits	One	Multiple	Multiple	One	Multiple	Multiple
Physician time	Low	Low	High	High	Medium	Medium
Specialized capital equipment	No	No	Yes	Yes	Yes	No
COST OF TREATMENT
Cost to patients when not reimbursed	$1,200 to $2,500	$1,200 to $2,500(5)	$1,500 to $3,000(6)	$9,600 to $16,400(7)	$1,500 to $3,000	$350 to $500 (8)
Reimbursed cost(9)	N/A	$1,200 to $2,500(5)	N/A	$3,100 to $6,800(7)	N/A	N/A

(1)	Reported commercial complication rate; does not include the complication rates from our early clinical studies.
(2)	Velopharyngeal insufficiency, a poor seal between the pharynx and the soft palate, which causes regurgitation of food and fluids when swallowing and can adversely affect speech.
(3)	FDA clearance not required for surgical procedures.
(4)	Cleared for tongue-based OSA only.
(5)	Plus annual accessory costs of $300 to $500.
(6)	Multiple procedures may be required.
(7)	Price varies considerably between out-patient procedure and hospital procedure requiring an overnight stay.
(8)	Ongoing treatments required.
(9)	Health insurers only reimburse for certain treatments of OSA; treatments for snoring are considered cosmetic and are not typically covered.

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Our Product

Our Pillar System

      Our Pillar System treats the soft palate, which is the most common contributor to the upper airway obstruction and tissue vibration that causes OSA and snoring. We designed our Pillar System to address several essential clinical and physiological requirements. We wanted to preserve the normal function of the soft palate while producing a long-lasting physiological effect. Additionally, we wanted the Pillar inserts to provide a long-term clinical benefit using a procedure that was completely reversible and used only well-known, well-understood biocompatible materials.

      We researched each of these requirements extensively by utilizing state-of-the-art imaging technologies, aerodynamic modeling, mathematical modeling and pre-clinical animal studies. Our early research focused on understanding the physiology of sleep disordered breathing, and we identified the soft palate as a major contributor to the upper airway obstruction and tissue vibration that causes OSA and snoring. As upper airway muscles and tissues relax during sleep, unsupported or excess tissue in the back of the mouth, the soft palate, and throat can narrow or collapse. As the person affected continues breathing, the air speed through the collapsed region increases and there is a corresponding drop in pressure. This lower pressure creates a lifting force similar to that of an airplane wing. These aerodynamic forces overwhelm the structural integrity of the soft palate, causing it to vibrate, which results in snoring sounds. When the negative pressure in the airway reaches a critical point, the combination of collapsible tissues and loss of muscle tone causes airway collapse or obstruction, resulting in OSA.

      We designed our Pillar System to stiffen and increase the structural integrity of the soft palate and improve its response to airflow, without interfering with normal soft palate functions such as swallowing or speech. Each precisely braided Pillar insert is approximately 18 mm (0.7 inches) in length and has an outer diameter of 2 mm (0.08 inches). We selected the Pillar insert design after significant screening work was done on a wide range of biomaterials. We braid our Pillar inserts to our precise specifications from a polyethylene terephthalate fiber that has been used for many years in implantable medical products such as surgical sutures and heart valve cuffs.

      Each Pillar insert is implanted in the soft palate using our specially-designed, single use delivery tool. At our facilities in St. Paul, we preload each insert into a delivery tool and enclose each delivery tool individually in a sterile package. Our proprietary delivery tool consists of a molded plastic handle and a 14-gauge needle, which we bend to our precise specifications in house. Although the components of the delivery tool are manufactured outside of our facility, we assemble and thoroughly inspect each delivery tool prior to shipment to our physician customers or international distributors.

      The implantation of the Pillar inserts into the soft palate tissue triggers the body’s natural fibrotic response to injury and the introduction of foreign bodies, which encapsulates and stimulates tissue growth into and around the inserts. The proprietary surface texture of the Pillar inserts promotes the growth of tissue into the inserts, providing structural support and serving to anchor and connect the Pillar inserts. In addition to the structural support provided by the inserts themselves, this natural fibrotic response further stiffens the soft palate tissue, effectively reducing or eliminating the tissue flutter that causes snoring and the retropalatal collapse that can obstruct the airway and cause OSA.

The Pillar Procedure

      Each patient receives three Pillar inserts as part of the Pillar Procedure. During the Pillar Procedure, the physician uses topical and local anesthetics to numb the soft palate tissue, and then individually implants each of the Pillar inserts into the muscle of the soft palate at the

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junction of the hard and soft palate. The Pillar inserts are placed as closely as possible to each other without touching (approximately 2 mm apart) to achieve maximum stiffening, effectively constructing a bridge of stiffer tissue between the inserts and preventing the relaxed soft palate tissue from stretching or collapsing during sleep.

      The reported commercial complication rate for the Pillar Procedure, with over 11,000 procedures performed to date, is less than 1%. The most commonly reported complication is the partial extrusion of a Pillar insert, which typically occurs as the result of an insert being implanted too shallow or too deeply in the soft palate. In the event of a partial extrusion, the physician simply removes the partially extruded insert and replaces it with a new Pillar insert.

Our Strategy

      Our goal is to have the Pillar Procedure recognized by the market as the preferred first-line palatal surgical treatment for patients suffering from mild to moderate OSA and snoring. We also intend to establish the Pillar Procedure as the preferred alternative treatment for individuals who are unable or unwilling to comply with CPAP therapy or who seek a safe and clinically effective alternative to CPAP therapy for reasons of lifestyle flexibility and convenience. To achieve these goals, we must successfully develop the market for the Pillar Procedure in the United States and internationally. We are undertaking the following key growth strategies and related tactics:

•  hire additional domestic sales representatives and engage additional international distributors;

•  increase physician awareness and adoption of the Pillar Procedure over other treatment options for patients suffering from sleep disordered breathing, and expand our marketing, co-marketing and sleep disordered breathing education initiatives with physicians;

•  enhance awareness and selection of the Pillar Procedure by patients and their bed partners through innovative, targeted, direct-to-consumer marketing programs and initiatives;

•  sponsor and participate in additional clinical studies that seek to further validate the clinical effectiveness of the Pillar Procedure as a stand-alone treatment for mild to moderate OSA and snoring or in combination with CPAP therapy to treat other areas of upper airway obstruction that cause OSA and snoring, and further expand the FDA-cleared indications for use of the Pillar Procedure;

•  continue building our self-pay snoring business and increase efforts to establish adequate and appropriate third-party healthcare insurance coverage and reimbursement for use of the Pillar Procedure to treat mild to moderate OSA; and

•  proactively explore new products and technologies that would allow us to effectively treat other areas of upper airway collapse.

      In the future, we intend to expand our marketing efforts beyond ENTs and oral maxillofacial surgeons to other physicians who treat sleep disordered breathing. We believe that the Pillar Procedure offers physicians a clinically effective, economically attractive, in-office procedure to treat patients who are afflicted with mild to moderate OSA and snoring.

      Based on the results of over 357 patients who participated in 13 clinical studies on the use of the Pillar Procedure to treat mild to moderate OSA and snoring, and with over 11,000 Pillar Procedures performed to date, we believe the Pillar Procedure can be the first-line alternative to the currently available surgical treatments for OSA and snoring, and a clinically effective alternative for CPAP patients who are unable or unwilling to comply with the life-long, nightly use requirement of CPAP therapy.

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Sales and Marketing

US Sales and Marketing Strategies

      We employ a direct sales force in the United States currently consisting of 12 sales representatives, each of whom markets and sells our Pillar System to an average of 800 ENTs and 500 oral maxillofacial surgeons, and has an average of 200 sleep centers in their respective territories. We plan to use a portion of the proceeds from this offering to increase the number of domestic sales representatives, thereby decreasing the size of each representative’s geographic territory, allowing them to establish new Pillar System physician customers and assist current physician customers to increase the number of individuals they treat with the Pillar Procedure. As part of this effort, we intend to work closely with our physician customers to implement practice support programs that help increase the number of patients who are referred to, or self-refer to, their sleep disordered breathing practices. These practice development programs will include the creation and implementation of comprehensive physician websites, customized co-marketing programs to promote physician practices to potential patients, and the development and delivery of a variety of sleep disordered breathing educational programs. These educational programs will be focused on educating primary care physicians on the diagnosis and available treatment options for patients suffering from sleep breathing disorders, as well as the health consequences of untreated OSA and snoring for both individuals and their bed partners.

      In addition to programs focused on our current and potential physician customers, we are developing marketing programs targeted to potential consumers and their bed partners. We will continue to expand our marketing programs to increase awareness of our Pillar System as a clinically effective, minimally-invasive, first-line treatment for individuals suffering from mild to moderate OSA and snoring. These initiatives will include implementing local and regional direct-to-consumer marketing programs to drive patient self-referrals and working closely with physicians to generate referrals from primary care physicians and pulmonologists.

International Sales Strategy

      We currently market our products in 12 countries outside the United States through independent distributors in Asia Pacific, Europe, the Middle East and South Africa, except for Germany where we sell directly to physician customers who participated in our European Clinical Studies. We have entered into multi-year distribution agreements with each of these international distributors, enabling them to sell our Pillar System, collectively, in 30 countries. We are evaluating other third-party distributors to introduce our Pillar System into additional international markets and act as an independent third-party distributor for the German market. We recently added a second marketing development manager focused on international sales. Revenues from international markets accounted for approximately 30% of our total net revenues for the fiscal year ended December 31, 2005. Prior to 2005, we did not sell our Pillar System in markets outside the United States other than a few direct sales to physicians in Germany in 2004.

      Under the terms of each of our international distribution agreements, we ship our products to our distributors upon receipt of purchase orders. Each of our independent distributors has the exclusive right to sell our Pillar System within a defined geographic territory. Many of these distributors also market and sell other medical products, although contractually they are not permitted to sell products directly competitive with our Pillar System. Our independent distributors purchase our Pillar System from us at a discount to our United States list price and resell our Pillar System to physicians, hospitals or clinics in their respective geographic territories. Currently, all of our sales to international distributors and to our physician customers in Germany are denominated in United States dollars. The end-user price of our Pillar System in each country is determined by the distributor and varies from country to country.

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Clinical Studies

      To date, 13 clinical studies have been completed in which the clinical efficacy of the Pillar Procedure was independently evaluated and assessed on a total of 357 patients. Five clinical studies have been completed on 206 patients to evaluate the clinical effectiveness of the Pillar Procedure for the treatment of mild to moderate OSA. Eight clinical studies have been completed on 151 patients to evaluate the clinical effectiveness of the Pillar Procedure to treat snoring.

      We believe that the collective results of the mild to moderate OSA and snoring clinical studies demonstrate that the Pillar Procedure is an effective first-line alternative palatal surgical procedure to a UPPP, currently the most common palatal surgical treatment for OSA and snoring. The Pillar Procedure also is a clinically effective, minimally invasive alternative for CPAP patients whose OSA is the result of palatal obstruction and who are unable or unwilling to comply with the life-long, nightly use requirement of CPAP therapy.

OSA

      Manuscripts reporting the clinical results from four studies have been published or accepted for publication in the AAO’s peer-reviewed ENT medical journal. A manuscript reporting the clinical results from a fifth study is complete and will be submitted to another peer-reviewed ENT medical journal. In total, these manuscripts provide the clinical results from five clinical studies conducted in the United States, Norway and Germany on 206 patients to evaluate the effectiveness of the Pillar Procedure to treat mild to moderate OSA. The reported clinical measure of improvement in the level of patients’ sleep disturbances in the European studies ranged from 48.0% to 62.5% at 90 days post-treatment, and 58% at one-year post-treatment. The reported clinical measure of improvement in the level of patients’ sleep disturbances in the United States study ranged from 34.4% to 45.3% at 90 days post-treatment. The various physician investigators who led these clinical studies are in the process of collecting two-year and one-year follow-up data, respectively, on patients who participated in these OSA clinical studies. In addition, the results of a computational research project conducted by a group of independent pulmonologists were published in 2005. These results confirmed, through the application of a finite element analysis mathematical model, that palatal stiffening resulting from the Pillar Procedure effectively reduced collapsibility of the upper airway.

      An analysis published in February 1996 with the approval of the American Sleep Disorders Association, or ASDA, of 19 clinical studies including 337 patients who underwent a UPPP procedure to treat their OSA reported a clinical measure of improvement in the level of patients’ sleep disturbances of 40.7%. In a separate analysis published in January 2005 by the ALROS, of the early complications experienced by 1,004 patients who underwent a UPPP, the post-surgical complication rate ranged from 3.4% to 19.4%, including severe complications such as post-operative pulmonary embolism, respiratory complications, hemorrhaging and cardiovascular events. The overall complication rate for the Pillar Procedure OSA clinical studies ranged between 2.7% and 9.9%, which complications, in comparison to the complications resulting from a UPPP procedure, were significantly less severe in nature. The vast majority of these complications consisted of partial extrusions of the Pillar insert as a result of inadvertent errors in implantation technique. As noted by the author of one of these published studies, there is a physician “learning curve” associated with performing the Pillar Procedure and partial extrusions of the Pillar inserts tend to occur less frequently with physicians who have performed more Pillar Procedures. A partially extruded Pillar insert is remedied by the physician simply removing the insert and replacing it with another Pillar insert. The reported commercial complication rate for the approximately 11,000 Pillar Procedures that have been performed worldwide, consisting of approximately 33,000 Pillar inserts, is less than 1%, with the primary complication again being relatively insignificant partial extrusions.

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Snoring

      Clinical results have been published or accepted for publication in peer-reviewed medical journals on 151 patients who participated in eight clinical studies in the United States, Norway, Germany and Singapore on the effectiveness of the Pillar Procedure to treat snoring. These clinical results were reported at both 90 days and one-year post-treatment, and demonstrated a decrease in snoring intensity of between 32% and 66%, and bed partner satisfaction of between 67% and 100% as a result of the decrease in snoring intensity. We are not aware of any published clinical study that reported comparable or superior results from the use of any other treatment for snoring. The various physician investigators who led these clinical studies are in the process of collecting two-year and three-year follow-up data on patients who participated in these snoring clinical studies.

Additional Clinical Studies

      We recently initiated or are involved in a series of significant, post-market clinical studies to further validate the efficacy of the Pillar Procedure in the treatment of mild to moderate OSA. These clinical studies are structured as evidence-based-medicine Level 1 prospective, randomized, blinded placebo-controlled studies. We also have begun a clinical study to evaluate the effectiveness of using the Pillar Procedure in combination with surgical procedures to treat patients who suffer from OSA as a result of multiple areas of upper airway obstruction. We also are sponsoring or participating in post-market clinical studies to expand indications for the Pillar inserts in combination with CPAP therapy to evaluate whether the combination therapy will make CPAP flow generators more tolerable for patients. In addition, we have initiated a clinical study to evaluate the use of an increased number of Pillar inserts for patients who have not been able to achieve optimal outcomes for snoring with just three Pillar inserts. We may initiate additional clinical studies to evaluate the use of Pillar inserts in combination with other non-surgical treatments for OSA and snoring. We intend to work with the independent physician investigators leading these various clinical studies to facilitate the publication of the data derived from these clinical studies in peer-reviewed medical journals and the presentation of this data at key scientific and medical meetings.

Third-Party Reimbursement

      Generally, patients who undergo the Pillar Procedure pay for the procedure out-of-pocket without third-party reimbursement. Treatments for snoring are deemed elective cosmetic surgery and are not reimbursed by third-party healthcare insurers. The use of the Pillar Procedure as a treatment for snoring will remain a self-pay procedure. We believe the number of Pillar Procedures performed to treat snoring will increase, and that the Pillar Procedure will remain profitable and sustainable for our physician customers.

      Certain therapies for the treatment of OSA, including CPAP and UPPP, generally are covered by third-party healthcare insurers, and we are seeking to obtain third-party reimbursement for individuals who elect to undergo the Pillar Procedure to treat their mild to moderate OSA. Third-party reimbursement depends upon decisions by the Centers for Medicare and Medicaid Services, or CMS, and by private insurers. CMS and third-party healthcare insurers may independently determine whether to reimburse a particular procedure as well as the method by which they will provide coverage. The methods of payment may include a lump sum prospective payment system based on a diagnosis related group or per diem, a blend between the healthcare provider’s reported costs and a fee schedule, a payment for all or a portion of charges deemed reasonable and customary, or a negotiated per capita fixed payment. Both CMS and third-party healthcare insurers are increasingly challenging the pricing of medical products and procedures. Even if the Pillar Procedure is eligible for reimbursement, the level of reimbursement may not be adequate to provide the incentive necessary for physicians to offer it to their patients. Additionally, CMS and third-party healthcare insurers may deny reimbursement

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if they determine that the device used in the treatment was investigative, was not medically necessary or was used for a non-approved indication.

      If the Pillar Procedure is covered by third-party reimbursement to treat mild to moderate OSA, patients will likely still need to undertake certain steps before undergoing the Pillar Procedure. Once a diagnosis of OSA is confirmed by a polysomnography sleep study, which is typically reimbursed, most health plan coverage policies require that non-interventional treatments first be attempted, including lifestyle changes, such as weight loss, and CPAP. In the event the patient is unable to comply with CPAP therapy, most insurers will reimburse certain OSA surgical procedures such as UPPP. However, other OSA procedures such as RF ablation, sclerotherapy and LAUP generally are not covered. The surgical procedures for OSA that are covered vary by individual health plans.

      Our reimbursement strategy focuses on obtaining coverage for the Pillar Procedure for treating mild to moderate OSA from private third-party healthcare insurers and Medicare. Obtaining coverage will depend, in large part, on published, peer-reviewed clinical literature demonstrating the effectiveness of the Pillar Procedure in treating patients suffering from mild to moderate OSA. There are several clinical studies underway, which we anticipate will further demonstrate the clinical effectiveness of the Pillar Procedure. With the publication of these studies, we will begin petitioning private third-party healthcare insurers and Medicare to initiate coverage of the Pillar Procedure.

      An important step in obtaining reimbursement is securing appropriate Current Procedural Terminology, or CPT Codes, which are administered by the American Medical Association, or AMA. CPT codes are used by all payors, including Medicare, to adjudicate claims and to reimburse for certain healthcare services, particularly physician fees. The AMA has an annual process to create new CPT codes, whereby physician societies are responsible for applying to the AMA for new CPT codes. We are working in collaboration with the AAO to provide the information necessary for creation of a CPT code for the Pillar Procedure. Three prospective, randomized placebo-controlled clinical studies of our Pillar System are underway in the United States and Europe, the data from which we intend to use to support our future application for a Pillar Procedure CPT code. We believe these clinical studies will not only support our CPT code reimbursement initiative, but also will supplement the results from our previous clinical studies validating the clinical efficacy of the Pillar Procedure in treating patients suffering from mild to moderate OSA.

      We also have applied to CMS for a HCPCS Level II code for our Pillar System. This code is critical to facilitate payment for our Pillar System when the Pillar Procedure is performed in an ambulatory surgery center setting. If approved, this HCPCS Level II code could go into effect by January 1, 2007. We also will be filing an application with CMS for New Technology Ambulatory Payment Classification, or APC, designation for our Pillar System. This APC designation is granted by CMS to provide a reimbursement mechanism for procedures using new medical technologies that are performed in the hospital outpatient setting. We also have developed and are distributing a reimbursement guide to facilitate physician and facility billing for the Pillar Procedure.

      Some ENTs have expressed a desire to continue performing the Pillar Procedure on a self-pay basis. We will continue to actively collaborate with the AAO and those physicians who seek to continue building the self-pay market for the Pillar Procedure, for both OSA and snoring, through innovative programs and services that encourage and train physicians and their staffs to effectively position the value of the Pillar Procedure to patients and establish clinical practice and administrative procedures that support the Pillar Procedure as a self-pay procedure.

      Reimbursement systems in international markets vary significantly by country and by region within some countries, and reimbursement approvals must be obtained on a country-by-country basis. In most markets, there are private insurance systems as well as government-managed

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systems. As with regulatory approval to sell the Pillar Procedure in international markets, it is the responsibility of each distributor, and in the case of Germany, our physician customers, to obtain any government and third-party payor reimbursement for the Pillar Procedure in the respective country. Many international markets have government managed healthcare systems that control reimbursement for new products and procedures. Market acceptance of our Pillar System will depend on the availability and level of reimbursement in international markets targeted by us.

Research and Development

      With a portion of the proceeds from this offering, we plan to accelerate our efforts to develop and introduce clinically relevant improvements and enhancements to our current Pillar System, and to develop new products and procedures to treat other areas of upper airway obstruction that contribute to OSA and snoring. In one of our first projects, we have begun a feasibility study exploring the possibility of leveraging our technology to treat base of tongue obstructions that cause OSA. In addition, we are evaluating a number of different ways to improve our Pillar System, including the use of materials or agents that could further enhance the clinical efficacy of the Pillar implant mechanism and further improve the ease-of-use of our Pillar System. We also are evaluating diagnostic products and technologies that could improve and simplify the process of identifying the areas of upper airway obstruction in individual patients.

      We incurred research and development expenses of approximately $3.3 million, $2.3 million, and $1.9 million for the fiscal years ended December 31, 2003, 2004 and 2005, respectively. We anticipate that we will continue to make significant investments in research and development as we explore opportunities to leverage the Pillar technology.

Intellectual Property

      Our success will depend in part on our ability to obtain and defend patent protection for our products and processes, to preserve our trade secrets and to operate without infringing or violating the proprietary rights of third parties. To date, we have been granted 26 United States patents that we believe provide us with broad intellectual property protection for our Pillar System and related concepts. Our patent coverage includes a wide array of devices, designs and materials implanted in the soft palate and other areas of the upper airway to induce tissue fibrosis and stiffening to treat OSA and snoring. This coverage is not limited to any specific design and covers any implant in the soft palate regardless of implant geometry or material selection. In addition, our intellectual property portfolio covers a wide variety of implants, tools and applications. We also have 27 additional pending United States patent applications.

      We also register the trademarks and trade names through which we conduct our business. To date, we have registered the trademarks “Pillar” and “Restore Medical” in the United Sates. In addition, we have trademark registrations or pending applications for our name and mark in China, the EU, Indonesia and Singapore, and, accordingly, we may not have protection for our name and mark in other jurisdictions.

      In addition to our United States patents and applications, our technology is covered by seven issued international patents in Germany, Great Britain, Norway, Hong Kong, Singapore and South Korea, 22 pending foreign patent applications in Germany, South Korea, Hong Kong, the EU, Canada, China, Japan, Australia, Indonesia, Malaysia and Taiwan and three PCT patent applications. We are dedicated to continuing our patent activity to ensure that our patent portfolio remains reflective of our intellectual property development. New developments and modifications of prior developments are periodically reviewed to identify necessary additions and modifications to our patent portfolio.

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      In addition to our patents, we rely on confidentiality and proprietary information agreements to protect our trade secrets and proprietary knowledge. These confidentiality and proprietary information agreements generally provide that all confidential information developed or made known to individuals by us during the course of their relationship with us is to be kept confidential and not disclosed to third parties, except in specific circumstances. The agreements also specifically provide that all inventions conceived by the individual relating to our technology in the course of rendering services to us shall be our exclusive property. If our proprietary information is shared or our confidentiality agreements are breached, we may not have adequate remedies, or our trade secrets may otherwise become known to or independently developed by competitors.

      We, like other firms that engage in the development and marketing of medical devices, must address issues and risks relating to patents and trade secrets. The coverage sought in a patent application can be denied or significantly reduced before or after a patent is issued. Consequently, our pending or future United States or foreign patent applications may not result in issued patents, or the scope of any patent protection may not exclude competitors or provide competitive advantages to us. Our current or future United States or foreign patents may be challenged, circumvented by competitors or others or may be found to be invalid or insufficient. Since patent applications are confidential until patents are issued in the United States, or corresponding applications are published in other countries, and since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain that we were the first to make the inventions covered by each of our pending patent applications, or that we were the first to file patent applications for such inventions.

      Many of our competitors who have significant resources and have made substantial investments in competing technologies may seek to apply for and obtain patents that will prevent, limit or interfere with our ability to make, use or sell our products either in the United States or in international markets. Further, the laws of certain foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States.

      There has been a history of litigation regarding patent and other intellectual property rights in the medical device industry, and companies in the medical device industry have employed intellectual property litigation to gain a competitive advantage. Accordingly, we may become subject to patent infringement claims or litigation in a court of law, or interference proceedings declared by the United States Patent and Trademarks Office, or USPTO, to determine the priority of inventions or an opposition to a patent grant in a foreign jurisdiction. The defense and prosecution of intellectual property suits, USPTO interference or opposition proceedings, and related legal and administrative proceedings, are both costly and time-consuming and could result in substantial uncertainty to us. Litigation or regulatory proceedings may also be necessary to enforce patent or other intellectual property rights of ours or to determine the scope and validity of other parties’ proprietary rights. Any litigation, opposition or interference proceedings may result in substantial expense to us and significant diversion of effort by our technical and management personnel. We may not have the financial resources to defend our patents from infringement or claims of invalidity. An adverse determination in any litigation could subject us to significant liabilities to third parties, require us to seek licenses from or pay royalties to third parties or prevent us from manufacturing, selling or using our proposed products, any of which could have a material adverse effect on our business and prospects. We are not currently a party to any patent or other litigation.

Manufacturing

      We manufacture our Pillar Systems in our leased facility in St. Paul, Minnesota, which includes a 4,000 square foot Class 100,000 clean room. We perform all final assembly, including manufacturing our Pillar inserts, assembling the parts for our Pillar delivery tool and inserting our Pillar inserts into the delivery tool in our facility. We outsource the plastic injection

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molding of our delivery tool. We make our Pillar inserts in our facility using our proprietary material braiding process. In addition, we perform all packaging, labeling, and inspection in-house. We use our FDA and EU compliant production and quality systems and processes in performing all of our operations. We follow lean manufacturing principles to provide high-quality, low-cost production of our Pillar System. We use our own proprietary production floor control system software to electronically generate manufacturing work instructions, track product-build status, establish lot control records, and maintain operator training records. We intend to continue to reduce our already low finished goods inventory costs by taking a variety of steps, including implementing continuous flow manufacturing and negotiating agreements with key suppliers.

      To provide us with even more flexibility for our future production capacity needs, we have made strategic component supplier selections based not only on their capabilities for supplying specific components, but also on their potential for providing outsourced contract assembly in the future, if desired.

Quality Systems

      We have a state-of-the-art quality system that focuses on the design, manufacture, packaging and distribution of the highest quality products and the continuous improvement of our systems. We achieved certification to the International Standards Organization, or ISO, quality system standards ISO 9001 and ISO 13485 in 2002. We successfully passed an FDA inspection in September 2004, and were most recently certified by our EU notified body with no nonconformities in December 2005. We believe our quality systems are robust and scalable, and will continue to support our expected growth while ensuring that our products meet the highest standards of safety and quality.

      Our quality system is a hybrid system that incorporates both paper systems and advanced electronic databases and tools. During 2006, we plan to improve the electronic portion of our quality systems to move toward a completely electronic environment. We will address quality assurance processes and tools to enable full audit trails and electronic signatures. These capabilities will provide for improved efficiency and will move us toward complete compliance with the FDA rules for management of electronic records.

      During 2005, we completed the transition of our quality system to meet the revised international standard (ISO 13485:2003) for medical device companies that is required for us to maintain the CE Mark on our products.

Quality Assurance

      We design, manufacture, package and distribute our products in accordance with our quality assurance system. Throughout the product development process, quality assurance assesses the product with thorough inspection and testing. Inspection plans and test techniques are developed to verify all device characteristics, to audit the process steps and to inspect finished goods performance.

      We developed and verified manufacturing processes to provide for consistent high quality throughout the product build and test process. We use our production floor control system software to manage the assembly and test process. This production floor control system provides detailed work instructions for our factory personnel, manages the training and certification records to ensure that all operators who perform the processes are qualified, and provides real-time status and results information on the manufacturing process. Component suppliers are approved through a supplier selection, qualification and certification process with the goal to certify the key suppliers and thereby reduce the need for incoming inspection.

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      As our Pillar System unit volume increases, we intend to make additional improvements to the quality assurance process. We also intend to implement additional manufacturing audit inspection processes to support the transition to a continuous flow manufacturing process.

Competition

      We believe that our competitive success will depend primarily on our ability to effectively create market awareness and influence clinical acceptance and adoption of our Pillar System by physicians and patients. The market for the treatment of sleep disordered breathing has attracted a high level of interest from various companies in the medical device industry. Our primary competitors include companies that offer CPAP and other therapeutic devices designed to treat OSA and snoring. Respironics, Inc. and ResMed Inc. are the leading competitors in the CPAP market, collectively accounting for an approximately 80% market share. Fisher & Paykel Healthcare Corp., Nellcor Puritan Bennett (a subsidiary of Tyco) and Vital Signs, Inc. are also competitors in the CPAP market. We also compete against the traditional surgical procedures often recommended by ENTs and other surgeons who specialize in treating OSA and snoring. Additionally, we are aware of development-stage companies that are attempting to develop new products or technologies that may be designed to treat other areas of airway obstruction that cause OSA.

      We believe that participants in the market for treating sleep disordered breathing, including OSA and snoring, compete on the basis of several factors, including clinical effectiveness, ease-of-use, patient comfort and compliance, cost, clinical acceptance and use by healthcare professionals. Competition also is affected by the length of time and resources required for the research and development of products, clinical trials and regulatory approval. The medical device industry is characterized by rapid and significant technological change. As a result, our success will depend, in part, on our ability to respond quickly to medical and technological changes through the development and introduction of new technologies or products.

      Many of our competitors and potential competitors have substantially greater capital resources than we do, including larger and more experienced research and development staffs and facilities. In addition, most of our competitors and potential competitors have substantially greater experience than we do in researching and developing new products, testing products in clinical trials, obtaining regulatory approvals and manufacturing and marketing medical devices. These competitors may be in a stronger position to respond quickly to new technologies and may be able to undertake more extensive marketing campaigns. Our failure to demonstrate the clinical efficacy and cost-effective advantages of our products over those of our competitors could adversely affect our business and results of operations.

Government Regulations

United States

      Our Pillar System received FDA 510(k) clearance in December 2002 for the treatment of socially disruptive snoring and was commercially introduced for snoring in April 2003. During the next 15 months we undertook clinical trials to substantiate the use of our Pillar System to treat patients suffering from mild to moderate OSA, and received 510(k) clearance in July 2004 for this expanded indication.

      Our Pillar System is regulated in the United States as a medical device by the FDA under the federal Food, Drug and Cosmetic Act, or FDC Act. Pursuant to the FDC Act, the FDA regulates the research, testing, manufacture, safety, labeling, storage, record keeping, advertising, distribution and production of medical devices in the United States. Noncompliance with applicable requirements can result in warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant pre-market approval for devices and criminal prosecution.

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      Medical devices are classified into one of three classes, Class I, II or III, on the basis of the controls deemed by the FDA to be necessary to reasonably ensure their safety and effectiveness. Class I devices are subject to general controls (e.g., labeling and adherence to good manufacturing practices, or GMPs). Class II devices are subject to general controls and to special controls (e.g., performance standards, and pre-market notification). Generally, Class III devices are those which must receive premarket approval by the FDA to ensure their safety and effectiveness (e.g., life-sustaining, life-supporting and implantable devices, or new devices which have not been found substantially equivalent to legally marketed devices), and require clinical testing to ensure safety and effectiveness and FDA approval prior to marketing and distribution. The FDA also has the authority to require clinical testing of Class II devices.

      If human clinical trials of a device are required and if the device presents a “significant risk,” the manufacturer or the distributor of the device is required to file an investigational device exemption, or IDE, application with the FDA prior to commencing human clinical trials. The IDE application must be supported by data, typically including the results of animal and, possibly, mechanical safety testing. If the IDE application is approved by the FDA, human clinical trials may begin at a specified number of investigational sites with a maximum number of patients, as approved by the FDA. Sponsors of clinical trials are permitted to sell those devices distributed in the course of the study, provided such costs do not exceed recovery of the costs of manufacture, research, development and handling. The clinical trials must be conducted under the auspices of an independent institutional review board established pursuant to FDA regulations.

      The FDC Act provides two basic review procedures for medical devices. Certain products may qualify for a submission authorized by Section 510(k) of the FDC Act, where the manufacturer gives the FDA a pre-market notification of the manufacturer’s intention to commence marketing the product. The manufacturer must, among other things, establish that the product to be marketed is substantially equivalent to another legally marketed product. Marketing may commence when the FDA issues a letter finding substantial equivalence. If a medical device does not qualify for the 510(k) procedure, the manufacturer must file a pre-market approval, or PMA, application with the FDA. This procedure requires more extensive pre-filing testing than the 510(k) procedure and involves a significantly longer FDA review process.

      A PMA application must include extensive supporting data, including preclinical and clinical trial data, as well as credible scientific and/or medical literature to substantiate the safety and effectiveness of the device. Following receipt of a PMA application, if the FDA determines that the application is sufficiently complete to permit a substantive review, the FDA will “file” the application. Under the FDC Act, the FDA has 180 days to review a PMA application, although the review of such an application more often occurs over a protracted time period, and generally takes approximately two years or more from the date of filing to completion.

      The PMA application approval process can be expensive, uncertain and lengthy. A number of devices for which pre-market approval has been sought have never been approved for marketing. The review time is often significantly extended by the FDA, which may require more information or clarification of information already provided in the filing. During the review period, an advisory committee likely will be convened to review and evaluate the application and provide recommendations to the FDA as to whether the device should be approved. In addition, the FDA will inspect the manufacturing facility to ensure compliance with the FDA’s GMP requirements prior to approval of an application. If granted, the approval of the PMA application may include significant limitations on the indicated uses for which a product may be marketed.

      We are required to register as a medical device manufacturer and to list our products with the FDA. As part of such medical device manufacturer registrations, we are periodically inspected by the FDA both for compliance with the FDA’s GMPs, and with other applicable

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regulations. These regulations require us to manufacture our products and maintain our documents in a prescribed manner with respect to manufacturing, testing and quality control activities. Furthermore, we are required to comply with various FDA requirements for design, safety, advertising and labeling. The advertising of most FDA-regulated products is subject to both FDA and Federal Trade Commission jurisdiction.

      We are required to provide information to the FDA on death or serious injuries alleged to have been associated with the use of our medical devices, as well as product malfunctions that would likely cause or contribute to death or serious injury if the malfunction were to recur. In addition, the FDA prohibits an approved device from being marketed for unapproved applications. If the FDA believes that a company is not in compliance, it can institute proceedings to detain or seize products, issue a recall, enjoin future violations, and assess civil and criminal penalties against the company, its officers and its employees. Failure to comply with applicable FDA regulatory requirements could have a material adverse effect on our business, financial condition and results of operations.

      Regulations regarding the manufacture and sale of our products are subject to change. We cannot predict what impact, if any, such changes might have on our business, financial condition or results of operations.

International

      We received CE Mark certification from the European Commission for the snoring indication and the OSA indication in May 2003 and December 2004, respectively. International sales of our products are subject to regulatory requirements that vary widely from country to country. The European Union has adopted rules which require that medical products receive the right to affix the CE Mark, an international symbol of adherence to quality assurance standards and compliance with applicable European medical device directives. As part of the CE compliance, manufacturers are required to comply with the ISO series of quality systems standards.

      We plan to continue to leverage the FDA clearance and CE Mark certification for OSA and snoring indications in support of other regulatory filings outside the United States, and provide regulatory dossiers to international regulatory agencies, as required. Additional countries will be added to the registration process as distributors are selected. The regulatory review process varies from country to country, and we cannot provide assurance that such approvals will be obtained on a timely basis or at all.

Product Liability and Insurance

      The development, manufacture and sale of medical products entail significant risk of product liability claims and product failure claims. We have conducted relatively limited clinical trials and clinical studies to date, and we do not yet have, and will not have for a number of years, sufficient clinical data to allow us to measure the long-term risk of such claims with respect to our products. We face an inherent business risk of financial exposure to product liability claims in the event the use of our products results in personal injury or death. We also face the possibility that defects in the design or manufacture of our products might necessitate a product recall. Although, to date, we have not received any product liability claims nor have we had any recalls, there can be no assurance that we will not experience losses due to product liability claims or recalls in the future. We currently maintain product liability insurance with coverage limits of $5.0 million per occurrence and $5.0 million annually in the aggregate, although we do not have sufficient experience to confirm whether the coverage limits of our insurance policies will be adequate. Product liability insurance is expensive, may be difficult to obtain and may not be available in the future on acceptable terms, or at all. Any claims against us, regardless of their merit or eventual outcome, could have a material adverse effect upon our business, financial condition and results of operations.

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Legal Proceedings

      We are not currently a party to any litigation and we are not aware of any pending or threatened litigation against us that could have a material adverse effect on our business, operating results or financial condition. The medical device industry in which we operate is characterized by frequent claims and litigation, including claims regarding patent and other intellectual property rights as well as improper hiring practices. As a result, we may be involved in various legal proceedings from time to time.

Employees

      As of December 31, 2005, we had a total of 55 employees, consisting of 21 employees in sales and marketing, five employees in research and development (including regulatory and clinical affairs), 22 employees in operations and quality assurance, and seven employees in general and administrative functions. All of these employees are located in the United States.

      From time to time we also employ independent contractors, consultants and temporary employees to support our operations. None of our employees are subject to collective bargaining agreements. We have never experienced a work stoppage and believe that our relations with our employees are good.

Properties

      Our headquarters and manufacturing facilities in St. Paul, Minnesota comprise approximately 21,000 square feet of leased space. We lease a total of approximately 38,000 square feet, and sublease 18,239 square feet to two third-party tenants. The lease space includes furnished office space, a 4,000 square foot Class 100,000 clean room housing manufacturing, an integrated client-server computer network, an ISO 13485 compliant intranet-based quality and product development system, a fully equipped 2,000 square foot research and development wet laboratory, a fully equipped prototype machine shop and warehouse space. The lease agreement for our St. Paul facility expires in October 2010.

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MANAGEMENT

Executive Officers and Directors

      The following table sets forth information regarding our executive officers, directors and director-nominees including their ages, as of March 3, 2006:

Name	Age		Position
J. Robert Paulson, Jr.		49	President, Chief Executive Officer and Director
John J. Foster		45	Senior Vice President of Commercial Operations
Edward W. Numainville		55	Vice President of Clinical and Regulatory Affairs
Philip E. Radichel		62	Vice President of Quality and Information Systems
John P. Sopp		42	Vice President of Operations
Paul J. Buscemi, Ph.D.		59	Vice President of Research and Development
Mark B. Knudson, Ph.D.		57	Chairman and Director
Ashley L. Dombkowski, Ph.D.		35	Director
Luke Evnin, Ph.D.		42	Director
Stephen Kraus		29	Director
John Schulte		57	Director
Howard Liszt		59	Director-Nominee
Richard Nigon		57	Director-Nominee

      Dr. Knudson is a member of the audit committee. Mr. Schulte and Dr. Evnin are members of the compensation committee. Mr. Kraus is a member of the nominating and corporate governance committee. Mr. Liszt has agreed to serve as one of our directors effective immediately after the completion of this offering, as well as a member of the audit committee and the nominating and corporate governance committee. Mr. Nigon has agreed to serve as one of our directors effective immediately after the completion of this offering, as well as a member of the audit committee and the nominating and corporate governance committee.

      J. Robert Paulson, Jr. was appointed President, Chief Executive Officer and a director of our company in April 2005. Prior to joining us, Mr. Paulson served as Chief Financial Officer and Vice President of Marketing for Endocardial Solutions, Inc. from August 2002 until January 2005 when it was acquired by St. Jude Medical, Inc. From 2001 to June 2002, Mr. Paulson was the Senior Vice President and General Manager of the Auditory Division of Advanced Bionics Corporation, and between 1995 and 2001, Mr. Paulson served in various capacities at Medtronic, Inc., including Vice President and General Manager of the Surgical Navigation Technologies business unit; Vice President of Corporate Strategy and Planning; and Director of Corporate Development. Mr. Paulson currently serves on the board of directors of two publicly held medical device companies, MedicalCV Inc. and Vascular Solutions, Inc. Mr. Paulson received a Bachelor of Arts in Accounting, Economics and Political Science from Luther College; a Master of Business Administration from the University of St. Thomas and his J.D. from Vanderbilt University School of Law.

      John J. Foster has served as our Senior Vice President of Commercial Operations since June 2004. From 2001 through 2003, he was executive director at Hill-Rom, Inc. (formerly Advanced Respiratory), where he launched the company’s pulmonary medical device into new markets. Mr. Foster also served as director of marketing and of pharmaceutical business

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development and strategic planning with Medtronic, Inc. from 1995 to 2001. He received a Bachelor of Arts in history and business from Oral Roberts University and completed the University of Minnesota Executive Development program.

      Edward W. Numainville has served as our Vice President of Clinical and Regulatory Affairs since August 2002. Mr. Numainville served as Vice President Regulatory/ Clinical Affairs, and Quality Systems at Microvena Corporation from 1999 to 2002. Prior to that he held positions in regulatory affairs with Medtronic, Inc., and SIMS Deltec, Inc. (formerly Pharmacia Deltec, Inc.). Mr. Numainville received a Bachelor of Arts from Metropolitan State University.

      Philip E. Radichel has served as our Vice President of Quality and Information Systems since October 2005. From November 2002 to October 2005, Mr. Radichel was our Director of Quality Assurance and Information Systems. From February 2002 to November 2002 he was a Vice President at Venturi Development Inc. Mr. Radichel was also Systems Manager at Integ Incorporated from December 1996 to February 2002. Mr. Radichel received a Bachelor of Science in Electrical Engineering from the University of Minnesota.

      John P. Sopp has served as our Vice President of Operations since April 2004 and was our Director of Operations from December 2002 to March 2004. From February 2002 to November 2002, Mr. Sopp served as a Vice President of Venturi Development, Inc. From 1995 to 2001, he served as Production Manager and Senior Molding Engineer with Integ Incorporated. Prior to that he held a position with SIMS Deltec. He also held engineering positions at UFE Incorporated, a custom injection molding company, and General Dynamics. Mr. Sopp received a Bachelor of Science in Mechanical Engineering from the University of Minnesota and a Masters Degree in Manufacturing Systems from the University of St. Thomas.

      Paul J. Buscemi has served as our Vice President of Research and Development since joining us in October 2005. From 1998 to October 2005, Dr. Buscemi was Director of New Technology at Advanced BioSurfaces, Inc, where he designed and tested a novel minimally invasive implant to treat osteoarthritis of the knee. He also has served as a consultant to international biomedical firms including Medtronic, Upshire-Smith, Becton Dickenson and UpJohn Pharmaceuticals, as well as several entrepreneurial companies in the Twin Cities area involved in device design, coatings and drug delivery. Dr. Buscemi received a Bachelor of Arts in Physics and Applied Mathematics, a Master of Science in Material Science, and a Ph.D. in Bioengineering and Biomedical Science from the University of Florida, Gainesville.

      Mark B. Knudson has served as our Chairman and a director since our inception in 1999 and served as our President from inception in 1999 until 2002. He currently serves as President and Chief Executive Officer of EnteroMedics Inc., a company developing devices for application in the treatment of gastrointestinal disorders, where he has served since 2003. Since 1999 he has also served as President and Chief Executive Officer of Venturi Development Group, Inc. Dr. Knudson is currently a member of the board of directors of several privately held companies. Dr. Knudson received a Bachelor of Science degree from Pacific Lutheran University and a Ph.D. in Cardiovascular Physiology from Washington State University. Dr. Knudson was elected to membership in Sigma Xi, a scientific research honor society of North America in 1975. He is a fellow of the American Heart Association.

      Ashley L. Dombkowski has served as one of our directors since January 2004. She has served as a General Partner of MPM Capital, a lifescience venture capital firm, since 2000. Prior to joining MPM, Dr. Dombkowski was a Healthcare Equity Analyst covering biotech, medical device and pharmaceutical companies with Tiger Management, L.L.C., a diversified hedge fund. Prior to Tiger, Dr. Dombkowski was an Associate at Dresdner RCM Global Investors. Dr. Dombkowski is also a director of several privately held companies.

      Luke Evnin has served as one of our directors since June 2000. Dr. Evnin has served as a General Partner of MPM Capital, a life science venture capital firm, since 2000. Prior to joining

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MPM, Dr. Evnin served in several positions, including general partner at Accel Partners from 1991 to 1998. Dr. Evnin is also a director of two publicly-held biopharmaceutical companies, Oscient Pharmaceuticals Corporation and Metabasis Therapeutics, Inc. He is also a director of several privately held companies.

      Stephen Kraus has served as one of our directors since January 2004. He currently serves as a Director of the Ironwood Equity Fund, a small business investment corporation, where he has served since January 2003. Since January 2003, Mr. Kraus has also served as a consultant to Bessemer Venture Partners, pursuing selected healthcare technology investments for Bessemer Venture Partners. Prior to his engagement with Ironwood and Bessemer Venture Partners, Mr. Kraus was a consultant at Bain and Company starting in 1999.

      John Schulte has served as one of our directors since October 2001. He currently is President and Chief Executive Officer of The Spectranetics Corporation, a publicly-held manufacturer of single-use medical devices used in minimally-invasive surgical procedures within the cardiovascular system, where he has served since January 1, 2003. From October 1, 2001 to December 31, 2002, Mr. Schulte was Chief Executive Officer of Consensus Pharmaceuticals, Inc., a privately-held biotechnology company. Prior to that, Mr. Schulte served from November 1998 to October 2001 as President and Chief Executive Officer of Somnus Medical Technologies, Inc., a medical device company specializing in the design, development, manufacturing and marketing of minimally-invasive medical devices for the treatment of upper airway disorders. Mr. Schulte has served as a director of The Spectranetics Corporation since 1996.

      Howard Liszt has been nominated to become one of our directors effective upon the completion of this offering. From January 2000 to the present, Mr. Liszt has served as a senior fellow at the University of Minnesota. Prior to that, he was Chairman of the board of Coleman Natural Products from 1999 to 2002. Mr. Liszt also served as Chief Executive Officer of Campbell Mithun from 1994 to 2000. Mr. Liszt currently is a member of the board of Zomax Incorporated, a publicly held supply chain management company, and also serves on its audit and compensation committee.

      Richard Nigon has been nominated to become one of our directors effective upon the completion of this offering. Mr. Nigon has served as Executive Vice President and Director of Corporate Finance of Miller Johnson Steichen Kinnard, Inc., an investment banking firm, from February 2001 to the present. Prior to that, Mr. Nigon was Senior Vice President and Chief Financial Officer of Dantis, Inc. from January 2000 to February 2001. Mr. Nigon was a certified public accountant at Ernst & Young LLP from 1970 to February 2000 and served as partner from 1981 to 2000. Mr. Nigon currently is a member of the board of Vascular Solutions, Inc., a publicly held medical device company, and Compex Technologies, Inc., a publicly held company that provides home electrotherapy products. He also serves on the audit and compensation committees of both of these companies.

      There are no family relationships among any of our directors or our executive officers. Each executive officer is elected or appointed by, and serves at the discretion of, our board of directors.

Board of Directors

      Our board currently consists of six directors, all of whom were elected as directors pursuant to a voting agreement among us and our stockholders that is contained within our investors rights agreement. The provisions of the voting agreement will terminate upon the completion of the offering made by this prospectus. Dr. Knudson is currently Chairman of our board.

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      Following this offering, our board of directors will consist of seven directors. Messrs. Liszt and Nigon have agreed to serve as directors effective immediately upon the completion of this offering, and Dr. Dombkowski has declared her intention to resign from the board effective immediately upon the completion of this offering. In addition, our amended and restated bylaws will provide that the authorized number of directors may be changed only by resolution of our board of directors.

Board Committees

      Our board of directors has established an audit committee, a compensation committee, and a nominating and corporate governance committee. Except for Dr. Knudson, all of the members of each of these standing committees are independent as defined under the rules of the Nasdaq National Market and, in the case of the audit committee, the independence requirements contemplated by Rule 10A-3 under the Securities Exchange Act.

      Audit Committee. Dr. Knudson currently serves on the audit committee, and will be joined by Messrs. Liszt and Nigon effective immediately after completion of this offering. Mr. Nigon is expected to be the chair of the audit committee and serve as the audit committee’s financial expert within the meaning of the regulations of the SEC and the rules of the Nasdaq National Market. The audit committee’s primary responsibilities include:

•  appointing, approving the compensation of, and assessing the qualifications and independence of our independent registered public accounting firm, which currently is KPMG LLP;

•  overseeing the work of our independent registered public accounting firm, including the receipt and assessment of reports from the independent auditor;

•  reviewing and discussing with management and our independent registered public accounting firm our annual and quarterly financial statements and related disclosures;

•  preparing the audit committee report required by SEC rules to be included in our annual proxy statements;

•  monitoring our internal control over financial reporting, disclosure controls and procedures;

•  reviewing our risk management status;

•  establishing policies regarding hiring employees from our independent registered public accounting firm and procedures for the receipt and retention of accounting related complaints and concerns;

•  meeting independently with our independent registered public accounting firm and management; and

•  monitoring compliance with the code of ethics for financial management.

      All audit and non-audit services must be approved in advance by the audit committee.

      Compensation Committee. Mr. Schulte and Dr. Evnin currently serve on the compensation committee. Mr. Schulte is the chair. The compensation committee’s responsibilities include:

•  annually reviewing and approving corporate goals and objectives relevant to compensation of our chief executive officer;

•  determining the compensation of our chief executive officer;

•  reviewing and approving, or making recommendations to our board of directors with respect to, the compensation of our other executive officers;

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•  overseeing an evaluation of our senior executives; and

•  overseeing and administering our cash and equity incentive plans.

      Nominating and Governance Committee. Mr. Kraus currently serves on the nominating and corporate governance committee and will be joined by Messrs. Liszt and Nigon effective immediately after completion of this offering. Mr. Kraus is the chair. The nominating and governance committee’s responsibilities include:

•  identifying individuals qualified to become members of our board of directors;

•  recommending to our board the persons to be nominated for election as directors and to each of our board’s committees;

•  reviewing and making recommendations to our board with respect to management succession planning;

•  developing, updating and recommending to our board corporate governance principles and policies;

•  overseeing the evaluation of our board; and

•  reviewing and making recommendations to our board with respect to director compensation.

Corporate Governance

      We believe that good corporate governance is important to ensure that, as a public company, we will be managed for the long-term benefit of our stockholders. In preparation for the offering being made by this prospectus, we and our board of directors have been reviewing the corporate governance policies and practices of other public companies, as well as those suggested by various authorities in corporate governance. We have also considered the provisions of the Sarbanes-Oxley Act and the rules of the SEC and Nasdaq National Market.

      Based on this review, our board of directors has taken steps to implement many of these provisions and rules. In particular, we have established and adopted charters for the audit committee, compensation committee and nominating and corporate governance committee, as well as a code of business conduct and ethics applicable to all of our directors, officers and employees.

Compensation Committee Interlocks and Insider Participation

      None of our executive officers serves as a member of the board of directors or compensation committee, or other committee serving an equivalent function, of any other entity that has one or more of its executive officers serving as a member of our board of directors or its compensation committee. None of the current members of the compensation committee of our board has ever been one of our employees.

Director Compensation

      Effective as of the completion of this offering, each director who is not also one of our employees will receive a fee of $2,500 for each board meeting attended plus an additional fee of $500 for each meeting of the audit, compensation, and nominating and corporate governance committees attended.

      Non-employee directors also will be eligible to receive nonstatutory stock options under our equity incentive plans. Under our current director compensation arrangements, each non-employee director will receive an option to purchase 25,000 shares of our common stock after the completion of this offering and an option to purchase 12,500 shares of common stock

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contemporaneously with each annual stockholder meeting, commencing in 2007. The chairman of the board will receive an additional option to purchase 5,000 shares of our common stock after the completion of this offering when he assumes that role. The audit committee chair will receive an additional option to purchase 5,000 shares of our common stock after the completion of this offering when he initially joins the audit committee and an additional option to purchase 2,500 shares of our common stock contemporaneously with each annual stockholder meeting, commencing in 2007. Such options will vest in their entirety one year from the date of grant.

      We reimburse all of our non-employee directors for reasonable travel and other expenses incurred in attending board of directors and committee meetings. Any director who is also one of our employees receives no additional compensation for serving as a director.

Liability Limitations and Indemnification

      The following description is intended as a summary only and is qualified in its entirety by reference to our restated charter and amended and restated bylaws filed as exhibits to the registration statement, of which this prospectus forms a part, and to Delaware law. The description of liability limitations and indemnification reflects provisions of our restated charter and bylaws that will become effective upon the completion of this offering. We refer in this section to our restated charter as our charter and to our amended and restated bylaws as our bylaws.

      Our charter and bylaws limit the liability of directors to the maximum 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 liability for:

•  any breach of their duty of loyalty to the corporation or its stockholders;

•  acts of omissions that are not in good faith or that involve intentional misconduct or a knowing violation of law;

•  unlawful payments of dividends or unlawful stock repurchases or redemptions; or

•  any transaction from which the director derived an improper personal benefit.

      The limitations do not apply to liabilities arising under the federal securities laws and do not affect the availability of equitable remedies, including injunctive relief or rescission.

      Our charter and bylaws provide that we will indemnify our directors and officers, and may indemnify other employees and agents, to the maximum extent permitted by law. We believe that indemnification under our bylaws covers at least negligence and gross negligence on the part of indemnified parties. Our bylaws also permit us to secure insurance on behalf of any officer, director, employee or agent for any liability arising out of actions taken in his or her capacity as an officer, director, employee or agent, regardless of whether the bylaws would permit indemnification.

      At present, there is no pending litigation or proceeding involving any of our directors, officers or employees in which indemnification is sought, nor are we aware of any threatened litigation that may result in claims for indemnification.

      Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons under our charter or bylaws or the indemnification agreements we have entered into with our directors and officers, we have been advised that in the opinion of the SEC this indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

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Executive Compensation

      The following table sets forth all compensation awarded to, earned by or paid for services rendered to us in all capacities during each of the last three fiscal years by our Chief Executive Officer and the other four most highly compensated executive officers whose salary and bonus earned in 2005 exceeded $100,000.

SUMMARY COMPENSATION TABLE

								Long-Term
								Compensation
								Awards
				Annual Compensation				Securities
								Underlying		All Other
Name and Principal Position		Fiscal Year		Salary		Bonus		Options(#)(1)		Compensation
J. Robert Paulson, Jr.(2)			2005	$	181,891	$	—		408,500	$	6,338
	President, Chief Executive Officer and Director
John J. Foster(3)			2005	$	206,000	$	—		—	$	6,209
	Senior Vice President of		2004		100,000		24,000		100,000		2,505
	Commercial Operations
Philip E. Radichel			2005	$	163,112	$	—		2,500	$	5,366
	Vice President of Quality and		2004		153,804		—		2,500		1,630
	Information Systems		2003		147,184		—		1,500		3,955
Edward W. Numainville			2005	$	164,658		—		—	$	1,914
	Vice President of Clinical and		2004		156,813		—		20,000		2,117
	Regulatory Affairs		2003		149,350		—		—		6,411
Susan L. Critzer(4)			2005	$	157,500	$	—		—	$	160,358
	Former President and CEO		2004		315,000		—		176,000		2,632
			2003		315,000		—		37,500		6,731
Paula J. Norbom(5)			2005	$	153,385	$	—		—	$	4,329
	Former Vice President of		2004		73,091		10,875		72,500		1,511
	Finance

(1)	Represents options granted pursuant to our 1999 Omnibus Stock Plan. The number of options shown have been adjusted to reflect the 1-for-2 reverse stock split which will occur before the completion of this offering.
(2)	Mr. Paulson joined us in April 2005.
(3)	Mr. Foster joined us in June 2004.
(4)	Ms. Critzer resigned as President and CEO in April 2005.
(5)	Ms. Norbom resigned as Vice President of Finance in March 2006.

Employment Contracts and Change in Control Agreements

     J.  Robert Paulson, Jr. Employment and Change in Control Agreement

      On April 11, 2005, we entered into an employment and change in control agreement with Mr. Paulson, our Chief Executive Officer. The agreement does not provide a specific term for Mr. Paulson’s employment; rather, Mr. Paulson’s employment with us is “at-will” and may be terminated at any time with or without notice, for any or no reason, at either Mr. Paulson’s or our option. The agreement provides that Mr. Paulson will receive a base salary of $250,000. Mr. Paulson was also granted an option to purchase 408,500 shares of our common stock at an exercise price of $1.10 per share pursuant to his agreement. Pursuant to his agreement, Mr. Paulson is also entitled to participate in our Management Incentive Plan, which is adopted by our board of directors on an annual basis and currently provides that he may also earn a yearly performance bonus of up to 30% of his base salary that may be paid with a combination of cash and our common stock if the performance criteria set by our board of directors are met

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by him and the company. Mr. Paulson’s agreement provides that if he is terminated without cause (i.e., for reasons other than a willful and deliberate violations of duties or failures to carry out orders, an act of personal dishonesty intended to result in personal enrichment at our expense or willful and deliberate misconduct) he will receive six months’ base salary and six months of COBRA payments. Also, upon a change in control, 50% of the remaining unvested portion of his stock option will automatically vest. Further, if Mr. Paulson resigns for good reason (i.e., a material reduction in his responsibilities or base salary or a relocation to more than 40 miles from our current facility),  or if he is terminated without cause following our change in control, he will receive twelve months’ base salary, twelve months of continued group health coverage and any unvested portion of his stock option will automatically vest. Additionally, for so long as shares of our preferred stock remain outstanding, in the event of our change in control, Mr. Paulson will be entitled to receive a transaction bonus equal to four percent of the net proceeds payable to the holders of our stock, options or warrants in the transaction, but only if outstanding preferred stockholders receive at least one times their original purchase price for their shares in the transaction after payment of the transaction bonus. For purposes of Mr. Paulson’s employment agreement, our change in control includes, among other things, a change in beneficial ownership of our securities from the date of the agreement resulting in a new beneficial owner holding 50% or more of the combined voting power of our securities.

Edward W. Numainville Change in Control Agreement

      On December 19, 2002, we entered into a change in control agreement with Mr. Numainville, our Vice President of Clinical and Regulatory Affairs. The agreement was amended in April 2004 to provide that the term of the agreement will extend through December 31, 2006. The agreement provides that Mr. Numainville’s employment with us is at-will and may be terminated at any time with or without notice, for any or no reason, at either Mr. Numainville’s or our option. The agreement provides that if Mr. Numainville resigns for good reason (i.e., a change in Mr. Numainville’s responsibilities resulting in a reduction in employment status, an unreasonable reduction in base salary after the change in control or a relocation to more than 100 miles from Mr. Numainville’s residence at the time of the agreement) or if he is terminated without cause (i.e., for reasons other than a willful and deliberate violations of duties or failures to carry out orders, an act of personal dishonesty intended to result in personal enrichment at our expense, willful and deliberate misconduct) following our change in control, then he will receive twelve months’ salary, including any pro-rated bonus to which he is entitled, along with twelve months of continued group health coverage, with the last six months of salary payments to be reduced by the amount of other employment income earned by Mr. Numainville during that time. For purposes of Mr. Numainville’s agreement, our change in control includes, among other things, a change in beneficial ownership of our securities resulting in a new beneficial owner holding 20% or more of the combined voting power of our securities.

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Stock Options

      The following table summarizes stock options granted to the executive officers named in the Summary Compensation Table above during our fiscal year ended December 31, 2005.

Option Grants in Fiscal Year 2005

	Individual Grants(1)
										Potential Realizable
			% of Total							Value at Assumed
	Number of		Options							Annual Rates of Stock
	Securities		Granted to							Price Appreciation for
	Underlying		Employees			Exercise				Option Term(4)
	Options		in Fiscal			Price Per		Expiration
Name	Granted		Year(2)			Share(3)		Date		5%	10%
J. Robert Paulson, Jr.		408,500		69.9	%	$	1.10		04/11/2015
John J. Foster		—		—			—		—
Philip E. Radichel		2,500		0.4	%	$	1.10		01/01/2015
Edward W. Numainville		—		—			—		—
Susan L. Critzer		—		—			—		—
Paula J. Norbom		—		—			—		—

(1)	Each option represents the right to purchase one share of common stock. The options shown in this column are all incentive stock options granted pursuant to our 1999 Omnibus Stock Plan. The options vest according to the following schedule: 25% on the first anniversary date of the option grant and in equal monthly installments thereafter over the next three years. Each option grant allows the individual to acquire shares of our common stock at a fixed price per share over a ten year period of time. To the extent not already exercisable, the options generally become exercisable in the event of a change of control. The number of options shown has been adjusted to reflect the 1-for-2 reverse stock split which will occur before the completion of this offering.
(2)	In 2005, we granted employees options to purchase an aggregate of 584,700 shares of common stock.
(3)	The exercise price may be paid in cash, by check or by money order. The exercise price shown has been adjusted to reflect the 1-for-2 reverse stock split which will occur before the completion of this offering.
(4)	There was no public market for our common stock as of December 31, 2005. “Potential Realizable Value” has been determined assuming a fair market value equal to $         per share (the mid-point of the initial public offering price range reflected on the cover of this prospectus). The compounding assumes a ten year exercise period for all option grants. The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by rules of the Securities and Exchange Commission and do not represent our estimate or projection of our future common stock prices. These amounts represent certain assumed rates of appreciation only. Actual gains, if any, on stock option exercises are dependent on the future performance of the common stock and overall stock market conditions. The amounts reflected in the table may not necessarily be achieved.

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     The following table sets forth certain information concerning the number and value of unexercised stock options held by the executive officers named in the Summary Compensation Table above as of December 31, 2005. There were no stock options exercised by such officers during fiscal year 2005.

Aggregated Value of Options Held at December 31, 2005

	Number of Unexercised				Value of Unexercised
	Options Held at				In-the-Money Options Held
	December 31, 2005(1)				at December 31, 2005(2)
Name	Exercisable		Unexercisable		Exercisable	Unexercisable
J. Robert Paulson, Jr.		—		408,500	$	$
John J. Foster		35,415		64,585	$	$
Philip E. Radichel		8,709		4,240	$	$
Edward W. Numainville		30,334		12,917	$	$
Susan L. Critzer		251,000		—	$	$
Paula J. Norbom		25,675		46,825	$	$

(1)	The number of shares and options shown has been adjusted to reflect the 1-for-2 reverse stock split which will occur before the completion of this offering.
(2)	There was no public market for our common stock as of December 31, 2005. “Value” has been determined by multiplying the number of shares underlying the options by the difference between an assumed initial public offering price of $         per share (the mid-point of the initial public offering price range reflected on the cover of this prospectus) and the per share option exercise price.

Employee Benefit Plans

1999 Omnibus Stock Plan

      Our 1999 Omnibus Stock Plan, which we refer to as our 1999 plan, was adopted in November 1999. Our stockholders have approved an amendment to the 1999 Plan to be effective upon the completion of this offering, whereby the number of shares of common stock authorized for issuance under the 1999 Plan will be 3,325,000 shares. As of March 3, 2006, options to purchase an aggregate of 1,405,862 shares of common stock were outstanding under the 1999 plan and an aggregate of 105,926 shares of common stock had been issued upon the exercise of stock options under the 1999 plan. Any options granted under the 1999 plan that expire or are terminated prior to exercise and any shares of common stock that were purchased by exercise of options granted under the 1999 plan and that we repurchase will be eligible for issuance under the 1999 plan.

      The 1999 plan provides for the grant of incentive stock options and nonstatutory stock options. Our officers, employees, directors, consultants, independent directors and affiliates are eligible to receive options under the 1999 plan; however, incentive stock options may only be granted to our employees.

      Our board of directors administers the 1999 plan, although it may delegate its authority to a committee. Our board of directors, or a committee to which it has delegated its authority, may select the recipients of options and determine, subject to any limitations in the 1999 plan:

•  the number of shares of common stock covered by options and the dates upon which those options become exercisable;

•  the exercise prices of options;

•  the duration of options; and

•  the methods of payment of the exercise price.

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      Certain option agreements issued pursuant to the 1999 Plan provide that upon the occurrence of a change in control event (as defined in the option agreements under the 1999 plan), 50% of the unvested options outstanding as of the date of the change of control event will become immediately exercisable. We have also entered into certain option agreements that provide that upon the occurrence of a change in control event (as defined in the option agreements under the 1999 plan), 100% of the unvested options outstanding as of the date of the change of control event will become immediately exercisable.

      Our board of directors may amend, modify or terminate any outstanding award, only with the consent of the holder, unless our board determines that the amendment, modification or termination would not materially and adversely affect the holder. Our board of directors may at any time amend, suspend or terminate the 1999 plan, except that, to the extent determined by our board, no amendment requiring stockholder approval under any applicable legal, regulatory or listing requirement will become effective until the requisite stockholder approval is obtained.

Executive Compensation Plan

      In November 2002 our board adopted an executive compensation plan for executive officers that eliminates dependent contribution for medical and dental coverage and provides for supervisor approved paid-time-off, the use of a company cell phone and medical and dental compensation for expenses that are not covered by our standard medical and dental health plans. Our board administers the executive compensation plan.

2005 Management Incentive Plan

      For our fiscal year ending December 31, 2005, we adopted a management incentive plan for our executive and senior officers that provides an annual bonus payout in cash and/or stock based on certain metrics set forth in the plan. Our board will determine the bonus, based principally upon achievement of business volume targets, increased operating profitability and achievement of individual management-by-objective metrics.

401(k) Plan

      Our retirement plan, which we refer to as the 401(k) plan, is qualified under Section 401 of the Internal Revenue Code, and provides retirement benefits to all full-time employees. Eligible employees may elect to reduce their current compensation by an amount no greater than the statutorily prescribed annual limit and may have that amount contributed to the 401(k) plan. Matching contributions may be made to the 401(k) plan at the discretion of our board. To date, we have not made any contributions to the 401(k) plan.

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PRINCIPAL STOCKHOLDERS

      The following table sets forth information with respect to the beneficial ownership of our common stock as of March 3, 2006 for:

•  each beneficial owner of more than 5% of our outstanding common stock;

•  each of our executive officers, directors and director-nominees; and

•  all of our executive officers, directors and director-nominees as a group.

      Beneficial ownership is determined 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 and include shares of common stock issuable upon the exercise of stock options, warrants or other convertible securities that are immediately exercisable or exercisable within 60 days after March 3, 2006. Except as otherwise indicated, all of the shares reflected in the table are shares of common stock and all persons listed below have sole voting and investment power with respect to the shares beneficially owned by them, subject to applicable community property laws. The information is not necessarily indicative of beneficial ownership for any other purpose.

      Percentage ownership calculations for beneficial ownership prior to this offering are based on 11,251,225 shares outstanding, on an as-if converted, post-split basis, as of March 3, 2006. Percentage ownership calculations for beneficial ownership after this offering also include the           shares we are offering hereby. Except as otherwise indicated in the table below, addresses of named beneficial owners are in care of Restore Medical, Inc., 2800 Patton Road, St. Paul, Minnesota 55113.

											Beneficial Ownership
		Beneficial Ownership Prior to Offering									After Offering
		Outstanding		Right to		Shares Beneficially					Shares Beneficially
		Shares		Acquire Within		Owned					Owned
Name and Address of		Beneficially		60 Days After
Beneficial Owner		Owned		March 3, 2006		Number		Percentage			Number		Percentage
5% Stockholders:
MPM Capital(1)			3,979,083		456,006		4,435,089		37.9	%		4,435,089
	601 Gateway Blvd., Ste. 350
	So. San Francisco, CA 94080
Venturi I, LLC(2)			1,560,141		42,165		1,602,306		14.2			1,602,306
	c/o EnteroMedics Inc.
	2800 Patton Road
	St. Paul, MN 55113
Bessemer Venture Partners(3)			1,379,308		—		1,379,308		12.3			1,379,308
	Bessemer Venture Partners
	1865 Palmer Ave., Ste. 104
	Larchmont, NY 10538
State Street Bank & Trust as Trustee for DuPont Pension Trust			890,288		—		890,288		7.9			890,288
	Dupont Capital Management
	Delaware Corporate Center
	One Righter Pkwy., Ste. 3200
	Wilmington, DE 19803
TH Lee Putnam Investment Trust — TH Lee, Putnam Emerging Opportunities Portfolio			862,069		—		862,069		7.7			862,069
	Putnam Investments
	1 Post Office Square
	Boston, MA 02109
General Electric Pension Trust			862,068		—		862,068		7.7			862,068
	GE Asset Management
	3003 Summer Street
	Stamford, CT 06905

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									Beneficial Ownership
	Beneficial Ownership Prior to Offering								After Offering
	Outstanding		Right to		Shares Beneficially				Shares Beneficially
	Shares		Acquire Within		Owned				Owned
Name and Address of	Beneficially		60 Days After
Beneficial Owner	Owned		March 3, 2006		Number		Percentage		Number		Percentage
Executive Officers, Directors and Director-Nominees:
J. Robert Paulson, Jr.(4)		—		102,125		102,125		*		102,125		*
John J. Foster(5)		—		45,830		45,830		*		45,830		*
Edward W. Numainville(6)		—		32,104		32,104		*		32,104		*
Phillip E. Radichel(7)		7,700		9,990		17,690		*		17,690		*
John P. Sopp(8)		—		23,940		23,940		*		23,940		*
Paul J. Buscemi		—		—		—		*		—		*
Mark B. Knudson(9)		1,567,326		40,410		1,607,736		14.2		1,607,736
Ashley L. Dombkowski		—		—		—		*		—		*
Luke Evnin(10)		3,979,083		456,006		4,435,089		37.9		4,435,089
Stephen Kraus		—		—		—		*		—		*
John Schulte(11)		—		30,000		30,000		*		30,000		*
Howard Liszt		—		—		—		*		—		*
Richard Nigon		—		—		—		*		—		*
All executive officers, directors and director-nominees as a group (13 persons)(12)		5,554,109		740,405		6,294,514		52.5		6,294,514

*	Represents beneficial ownership of less than 1%.
(1)	Consists of 295,645 shares and warrants to purchase 33,880 shares held by MPM BioVentures II, L.P.; 2,678,721 shares and warrants to purchase 306,986 shares held by MPM BioVentures II-QP, L.P.; 943,043 shares and warrants to purchase 108,073 shares held by MPM BioVentures GmbH & Co. Parallel-Beteiligungs KG and 61,674 shares and warrants to purchase 7,067 shares held by MPM Asset Management Investors 2000 B LLC. MPM II L.P. and MPM II LLC are the direct and indirect general partners of MPM BioVentures II, L.P., MPM BioVentures II-QP L.P. and MPM BioVentures GmbH & Co. Parallel-Beteilingungs KG. Ansbert Gadicke, Nicholas Galakatos, Michael Steinmetz, Kurt Wheeler and Luke Evnin, one of the members of our board of directors, are investment managers of MPM II LLC and MPM Asset Management Investors 2000 B LLC, and therefore hold shared voting and/or dispositive power over the shares held by MPM BioVentures II, L.P., MPM BioVentures II-QP, L.P., MPM BioVentures GmbH & Co. Parallel-Beteiligungs KG and MPM Asset Management Investors 2000 B LLC. Each of these investment managers disclaim beneficial ownership of the shares owned by the MPM Capital funds except to the extent of their proportionate pecuniary interest therein.
(2)	Consists of 1,560,141 shares and warrants to purchase 42,165 shares. Mark B. Knudson, the chairman of our board of directors, holds voting and/or dispositive power over the shares held by Venturi I, LLC. Dr. Knudson disclaims beneficial ownership of the shares held by Venturi I, LLC except to the extent of his pecuniary interest therein.
(3)	Consists of 1,018,966 shares held by Bessemer Venture Partners VI, L.P.; 343,102 shares held by Bessemer Venture Partners Co-Investment L.P. and 17,240 shares held by Bessemer Venture Partners VI Institutional L.P.
(4)	Consists of options to purchase 102,125 shares that are currently exercisable or exercisable within 60 days of March 3, 2006.
(5)	Consists of options to purchase 45,830 shares that are currently exercisable or exercisable within 60 days of March 3, 2006.
(6)	Consists of options to purchase 32,104 shares that are currently exercisable or exercisable within 60 days of March 3, 2006.
(7)	Consists of 7,700 shares owned by Mr. Radichel and options to purchase 9,990 shares that are currently exercisable or exercisable within 60 days of March 3, 2006.
(8)	Consists of options to purchase 23,940 shares that are currently exercisable or exercisable within 60 days of March 3, 2006.
(9)	Consists of 7,185 shares, warrants to purchase 410 shares and options owned by Dr. Knudson to purchase 40,000 shares that are currently exercisable or exercisable within 60 days of March 3, 2006. Also consists of the 1,560,141 shares and warrants to purchase 42,165 shares owned by Venturi I, LLC. See Footnote (2). Dr. Knudson, the chairman of our board of directors, holds voting and/or dispositive power over the shares held by Venturi I, LLC. Dr. Knudson disclaims beneficial ownership of the shares owned by Venturi I LLC except to the extent of his proportionate pecuniary interest therein.

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(10)	Consists of 3,979,083 shares and warrants to purchase 456,006 shares owned by MPM Capital Funds. See Footnote (1). As described in footnote (1), Dr. Evnin, one of the members of our board of directors, holds shared voting and/or dispositive power over the shares held by MPM BioVentures II, L.P., MPM BioVentures II-QP, L.P., MPM BioVentures GmbH & Co. Parallel-Beteiligungs KG and MPM Asset Management Investors 2000 B LLC. Dr. Evnin disclaims beneficial ownership of the shares owned by the MPM Capital funds except to the extent of his proportionate pecuniary interest therein.
(11)	Consists of options to purchase 30,000 shares that are currently exercisable or exercisable within 60 days of March 3, 2006.
(12)	See footnotes (4)-(11). Includes 740,405 shares of common stock issuable upon exercise of options and warrants currently exercisable or exercisable within 60 days of March 3, 2006.

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RELATED-PARTY TRANSACTIONS

      Since January 1, 2003, we have entered into the following transactions with our directors, director-nominees, officers and holders of more than five percent of our voting securities and affiliates of our directors, director-nominees, officers and five percent stockholders.

Sublease Agreement

      On October 1, 2005, we entered into a sublease agreement with EnteroMedics, Inc, pursuant to which we sublease to EnteroMedics approximately 7,930 square feet of office space (and approximately 6,268 square feet of common space) in our facility in St. Paul. The total annual payments to be made to us under the lease are approximately $92,000. Mark B. Knudson, the chairman of our board of directors, is the President and Chief Executive Officer and a director of EnteroMedics.

Registration Rights

      We have granted registration rights to the holders of our preferred stock and to certain holders of warrants to purchase our preferred stock, pursuant to the terms of an investor rights agreement. Upon the completion of this offering, all of the outstanding shares of our preferred stock, including shares issuable upon exercise of outstanding warrants to purchase preferred stock, will automatically convert into a total of 10,730,462 shares of our common stock and the holders of these shares will have the right to require us to register these shares, together with other shares of common stock they hold, under the Securities Act under specific circumstances. As of the date of this prospectus, the holders of preferred stock, including shares issuable upon exercise of outstanding warrants to purchase preferred stock, held an aggregate of 15,497,955 shares of preferred stock and therefore will hold a total of 10,730,462 registrable shares upon completion of this offering. After registration pursuant to these rights, these shares will become freely tradable without restriction under the Securities Act. The following related parties have registration rights:

	Number of
Name of Stockholder	Registrable Shares
Mark B. Knudson		7,185
Venturi I, LLC(1)		810,141
MPM BioVentures II, L.P.(2)		306,319
MPM BioVentures II-QP, L.P.(2)		2,775,444
MPM BioVentures GmbH & Co. Parallel-Beteiligungs KG(2)		977,093
MPM Asset Management Investors 2000 B LLC(2)		63,900
Bessemer Venture Partners VI L.P.(3)		1,018,966
Bessemer Venture Partners Co-Investment L.P.(3)		343,102
Bessemer Venture Partners VI Institutional L.P.(3)		17,240
State Street Bank & Trust as Trustee for DuPont Pension Trust		890,288
TH Lee Putnam Investment Trust — TH Lee, Putnam Emerging Opportunities Portfolio		862,069
General Electric Pension Trust		862,068
Total:		8,933,815

(1)	Mark B. Knudson, the chairman of our board of directors, is also the President and Chief Executive Officer of Venturi I, LLC.
(2)	Luke B. Evnin, a member of our board of directors, is a general partner of MPM Capital and Ashley L. Dombkowski, a member of our board of directors, is a general partner of MPM Capital.
(3)	Stephen Kraus, a member of our board of directors, serves as a consultant to Bessemer Venture Partners.

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Securities Issued to Insiders

      The following summarizes purchases of our securities since January 1, 2003 by our executive officers, directors and holders of more than 5% of our common stock other than compensatory arrangements.

2003 Bridge Loan

      On June 16, 2003, we entered into an 8.00% Bridge Loan Agreement (2003 Bridge Agreement) with nine individuals and entities, including MPM Capital and Mark B. Knudson. During 2003, we issued promissory notes totaling $5,374,462 (2003 Bridge Notes) pursuant to the 2003 Bridge Agreement. Prior to that, on October 31, 2002, we issued a convertible promissory note to Venturi I, LLC in the amount of $675,000. Mark B. Knudson, the chairman of our board of directors, is a director and the president of Venturi I. All outstanding principal and accrued interest under the Venturi Note and the 2003 Bridge Notes converted into our Series C-1 preferred stock on January 28, 2004.

      The 2003 Bridge Notes were issued with detachable warrants to acquire 112,000 shares of our common stock at $1.10 per share. On December 9, 2003 we issued warrants to purchase 223,957 shares of our common stock to the parties holding 2003 Bridge Notes resulting in a total of 335,957 common stock warrants. The 223,957 additional warrants were issued in connection with an amendment to our 2003 Bridge Notes that eliminated the contingent beneficial conversion feature and amended the price of the previously issued warrants from $1.10 to $0.02 per share.

      Of the $5,374,462 of 2003 Bridge Notes and 335,957 common stock warrants sold pursuant to the 2003 Bridge Agreement, $5,006,520 of the 2003 Bridge Notes and 312,743 common stock warrants were sold to the following officers, directors and holders of more than five percent of our voting securities:

	Amount of 2003		Number of Common
Name	Bridge Notes		Stock Warrants
MPM Capital(1)	$	5,000,000		312,333
Mark B. Knudson	$	6,520		410

(1)  Consists of a $371,500 convertible promissory note and 23,206 common stock warrants held by MPM BioVentures II, L.P., a $3,366,000 convertible promissory note and 210,263 common stock warrants held by MPM BioVentures II-QP, L.P., a $1,185,000 convertible promissory note and 74,023 common stock warrants held by MPM BioVentures GmbH & Co. Parallel-Beteiligungs KG and a $77,500 convertible promissory note and 4,841 common stock warrants held by MPM Asset Management Investors 2000 B LLC. Luke B. Evnin, a member of our board of directors, is a general partner of MPM Capital and Ashley L. Dombkowski, a member of our board of directors, is a general partner of MPM Capital.

Series C and Series C-1 preferred stock

      On January 28, 2004, we entered into an agreement with 20 individuals and entities, including Mark B. Knudson, Venturi I, LLC, MPM Capital, Bessemer Venture Partners, TH Lee Putnam Investment Trust, General Electric Pension Trust and DuPont Pension Trust, to sell, in a private placement, an aggregate of 7,615,675 shares of our Series C preferred stock and an aggregate of 2,498,833 shares of our Series C-1 preferred stock. The total aggregate offering price for this sale was $26,500,011. All shares of our Series C and Series C-1 preferred stock will be automatically converted into 7,614,930 shares of our common stock upon completion of this offering.

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      Of the 7,615,675 shares of Series C and 2,498,833 shares of Series C-1 preferred stock sold pursuant to the Series C financing, 6,068,017 shares of Series C and 2,347,852 shares of Series C-1 preferred stock were sold to the following related parties:

Name	Series C Shares		Series C-1 Shares		Purchase Price(1)
Mark B. Knudson		—		2,671	$	6,998
MPM Capital(2)		763,359		2,048,731	$	7,367,676
Venturi I, LLC(3)		—		296,450	$	776,699
Bessemer Venture Partners VI, L.P.(4)(5)		1,832,060		—	$	4,799,997
TH Lee Putnam Investment Trust		1,145,039		—	$	3,000,002
General Electric Pension Trust		1,145,038		—	$	3,000,000
DuPont Pension Trust		1,182,521		—	$	3,098,205

(1)	Of the aggregate $22,049,577 purchase price paid by related parties, an aggregate amount of $6,144,374 was paid by converting all of the outstanding promissory notes that were convertible into our Series C-1 preferred stock.
(2)	Consists of 56,718 shares of Series C preferred stock and 152,220 shares of Series C-1 preferred stock held by MPM BioVentures II, L.P., 513,893 shares of Series C preferred stock and 1,379,207 shares of Series C-1 preferred stock held by MPM BioVentures II-QP, L.P., 180,916 shares of Series C preferred stock and 485,549 shares of Series C-1 preferred stock held by MPM BioVentures GmbH & Co. Parallel-Beteiligungs KG and 11,832 shares of Series C preferred stock and 31,755 shares of Series C-1 preferred stock held by MPM Asset Management Investors 2000 B LLC. Luke B. Evnin, a member of our board of directors, is a general partner of MPM Capital and Ashley L. Dombkowski, a member of our board of directors, is a general partner of MPM Capital.
(3)	Mark B. Knudson, the chairman of our board of directors, is also the President and Chief Executive Officer of Venturi I, LLC.
(4)	Stephen Kraus, a member of our board of directors, serves as a consultant to Bessemer Venture Partners.
(5)	Following the Series C and C-1 financing, Bessemer Venture Partners VI, L.P. transferred its holdings such that 1,353,436 shares of Series C preferred stock are held by Bessemer Venture Partners VI, L.P.; 455,724 shares of Series C preferred stock are held by Bessemer Venture Partners Co-Investment L.P. and 22,900 shares of Series C preferred stock are held by Bessemer Venture Partners VI Institutional L.P.

     On January 28, 2004, in connection with our Series C and Series C-1 preferred stock financing we issued an aggregate of 238,545 warrants to purchase our Series C-1 preferred stock to Comerica Bank and MPM Capital, which replaced the warrants to purchase our Series B preferred stock that were issued on March 12, 2003 and the warrants to purchase our Series B preferred stock issued December 19, 2002. Of the 238,545 warrants to purchase Series C-1 preferred stock that were issued, 14,178 are held by MPM BioVentures II, L.P., 128,472 are held by MPM BioVentures II-QP, L.P., 45,228 are held by MPM BioVentures GmbH & Co. Parallel-Beteiligungs KG and 2,957 are held by MPM Asset Management Investors 2000 B LLC.

Additional Security Issuances

      In addition to the transaction set forth above, we have also entered in the following transactions with our officers, directors and holders of more than five percent of our voting securities:

•  On March 12, 2003, we issued 66,667 warrants for our Series B preferred stock to MPM Capital as consideration for a related party’s guarantee of a $2,500,000 loan to us from Comerica. These warrants were replaced by the warrants for Series C-1 preferred stock issued on January 28, 2004.

•  On June 12, 2003, we issued warrants to purchase 14,040 shares of our common stock to Venturi I, LLC in exchange for an amendment to the promissory note issued by us to Venturi I, LLC in the amount of $675,000 on October 31, 2002.

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•  On December 9, 2003, the promissory note originally issued by us to Venturi I, LLC on October 31, 2002 was amended to eliminate the beneficial conversion feature and change the interest rate from 8% to 12% retroactive to the original issuance date and extend the maturity date to December 31, 2003. In connection with this amendment, on December 9, 2003, we also issued 28,125 additional common stock warrants to Venturi I, LLC resulting in an amended warrant to purchase a total of 42,165 shares of our common stock. In addition, the exercise price of the amended warrant changed from $1.10 to $0.02 per share.

Indemnification Agreements

      We expect to enter into indemnification agreements with each of our directors and executive officers. Each indemnification agreement provides that we will indemnify the director or executive officer to the fullest extent permitted by law for claims arising in his or her capacity as our director, officer, employee or agent, provided that he or she acted in good faith and in a manner that he or she reasonably believed to be in, or not opposed to, our best interests and, with respect to any criminal proceeding, had no reasonable cause to believe that his or her conduct was unlawful. If the claim is brought by us or on our behalf, we will not be obligated to indemnify the director or executive officer if he or she is found liable to us, unless the court determines that, despite the adjudication of liability, in view of all the circumstances of the case the director is fairly and reasonably entitled to indemnity. In the event that we do not assume the defense of a claim against our director or executive officer, we are required to advance his or her expenses in connection with his or her defense, provided that he or she undertakes to repay all amounts advanced if it is ultimately determined that he or she is not entitled to be indemnified by us.

Consulting Agreement

      Effective January 1, 2002, we entered into a consulting agreement with Venturi Development, Inc., or VDI. The consulting agreement provided for the consultants to receive compensation, in the form of cash for services provided. The total cash payments in 2003 were $444,765. This consulting agreement terminated in 2003 and we made no payments to VDI in 2004 and 2005. The majority of the consulting services provided by VDI were recorded as research and development and clinical and regulatory expenses. Mark B. Knudson, Ph.D., the chairman of our board of directors, is the president and chief executive officer and a director of VDI.

Director and Executive Compensation

      Please see “Management — Director Compensation” and “— Executive Compensation” for information regarding the compensation of our non-employee directors and executive officers.

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DESCRIPTION OF CAPITAL STOCK

General

      The following description of our capital stock is intended as a summary only and is qualified in its entirety by reference to our amended and restated charter and amended and restated bylaws filed as exhibits to the registration statement of which this prospectus forms a part and to Delaware law. The descriptions of our common stock and preferred stock reflect changes to our capital structure that will occur prior to or upon the completion of this offering. We refer in this section to our amended and restated charter as our charter and our amended and restated bylaws as our bylaws.

      Upon consummation of this offering, our authorized capital stock will consist of 50,000,000 shares of common stock, par value $0.01 per share, and 5,000,000 shares of preferred stock, par value $0.01 per share, all of which preferred stock will be undesignated.

      As of March 3, 2006, we had issued and outstanding:

•  855,926 shares of common stock, held by 25 holders of record;

•  750,000 shares of Series A convertible preferred stock, held by one holder of record;

•  4,185,411 shares of Series B convertible preferred stock, held by 11 holders of record;

•  7,615,675 shares of Series C convertible preferred stock, held by 15 holders of record; and

•  2,498,833 shares of Series C-1 convertible preferred stock, held by 10 holders of record.

      Upon the completion of this offering, all of the outstanding shares of our preferred stock will automatically convert into a total of 10,395,299 shares (on a post-split basis) of our common stock and there will be no preferred stock outstanding. Approximately           shares of our common stock will be outstanding immediately after this offering on a post-split basis, assuming no exercise by the underwriters of their over-allotment option. This number excludes 768,680 shares of common stock issuable upon the exercise of warrants outstanding as of March 3, 2006, on an as-if converted basis and at a weighted average exercise price of $1.60 per share; 1,405,862 shares of common stock issuable upon the exercise of options outstanding as of March 3, 2006, at a weighted average exercise price of $1.09 per share; and 1,813,212 shares of common stock expected to be available for future issuance under our stock incentive plans upon completion of this offering.

Common Stock

      The holders of our common stock are generally entitled to one vote for each share held on all matters submitted to a vote of the stockholders and do not have any cumulative voting rights. Holders of our common stock are entitled to receive proportionally any dividends declared by our board of directors, subject to any preferential dividend rights of outstanding preferred stock.

      In the event of our liquidation or dissolution, holders of our common stock are entitled to share ratably in all assets remaining after payment of all debts and other liabilities, subject to the prior rights of any outstanding preferred stock. Holders of our common stock have no preemptive, subscription, redemption or conversion rights. All outstanding shares of our common stock are validly issued, fully paid and nonassessable. The shares to be issued by us in this offering will be, when issued and paid for, validly issued, fully paid and nonassessable.

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      The rights, preferences and privileges of holders of our common stock are subject to, and may be adversely affected by, the rights of holders of shares of any series of preferred stock that we may designate and issue in the future.

Preferred Stock

      Our charter provides that we may issue up to 5,000,000 shares of preferred stock in one or more series as may be determined by our board of directors. Our board has broad discretionary authority with respect to the rights of any new series of preferred stock and may establish the following with respect to the shares to be included in each series, without any vote or action of the stockholders:

•  the number of shares;

•  the designations, preferences and relative rights, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences; and

•  any qualifications, limitations or restrictions.

      We believe that the ability of our board of directors to issue one or more series of preferred stock will provide us with flexibility in structuring possible future financings and acquisitions, and in meeting other corporate needs that may arise. The authorized shares of preferred stock, as well as authorized and unissued shares of common stock, will be available for issuance without action by our stockholders, unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded.

      Our board of directors may authorize, without stockholder approval, the issuance of preferred stock with voting and conversion rights that could adversely affect the voting power and other rights of holders of common stock. Although our board has no current intention of doing so, it could issue a series of preferred stock that could, depending on the terms of such series, impede the completion of a merger, tender offer or other takeover attempt of our company. Our board could also issue preferred stock having terms that could discourage an acquisition attempt through which an acquiror may be able to change the composition of our board, including a tender offer or other transaction that some, or a majority, of our stockholders might believe to be in their best interests or in which stockholders might receive a premium for their stock over then-current market price. Any issuance of preferred stock therefore could have the effect of decreasing the market price of our common stock.

      Our board of directors will make any determination to issue such shares based on its judgment as to our best interests of our company and stockholders. We have no current plan to issue any preferred stock after this offering.

Registration Rights

      We have granted the registration rights described below to the holders of our preferred stock and to certain holders of warrants to purchase our preferred stock, pursuant to the terms of an investor rights agreement. Upon the completion of this offering, all of the outstanding shares of our preferred stock, including shares that are issued upon exercise of outstanding warrants to purchase preferred stock, will automatically convert into a total of 10,730,462 shares of our common stock and the holders of these shares will have the right to require us to register these shares, together with other shares of common stock they hold, under the Securities Act under the circumstances set forth below. As of the date of this prospectus, the holders of preferred stock, including holders of unexercised warrants to purchase our preferred stock, held an aggregate of 15,497,955 shares of preferred stock and therefore, after conversion into shares of common stock, will hold a total of 10,730,462 registrable shares upon completion of this offering, assuming full exercise of all outstanding

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warrants. After registration pursuant to these rights, these shares will become freely tradable without restriction under the Securities Act. The following description of the terms of the registration rights agreement is intended as a summary only and is qualified in its entirety by reference to the investor rights agreement filed as an exhibit to the registration statement of which this prospectus forms a part.

      Demand Registration Rights. Any time after six months after our initial public offering and on no more than one occasion during any twelve-month period, the holders of at least 51% of our registrable shares will have the right to request that we register all or a portion of the registrable shares then held by the requesting stockholders, provided that the shares requested to be registered have an aggregate value of at least $10.0 million. Such a registration is referred to as a demand registration and we are required to use our best efforts to cause any such demand registration to become effective under the Securities Act. The demand registration rights will cease after we have effected two such demand registrations. In addition to the demand registration rights, the holders of registrable shares will have the right to request that we register on Form S-3 all or a portion of the registrable shares held by them, provided that the holders propose to sell at least 100,000 registrable shares pursuant to such registration statement on Form S-3. Such registration is referred to as a Form S-3 registration. We will not be obligated to effect a demand registration or a Form S-3 registration within 180 calendar days of the effective date of an immediately preceding Form S-3 registration of our securities.

      Incidental Registration Rights. If we propose to register shares of our common stock under the Securities Act (other than a registration relating solely to the initial public offering of our securities, the sale of securities of participants in our stock option plan, a registration relating to a corporate reorganization or transaction under Rule 145 of the Securities Act, a registration on any form that does not include substantially the same information as would be required to be included in a registration statement covering the sale of registrable securities, or a registration in which the only common stock being registered is common stock issuable upon conversion of debt securities that are also being registered), the holders of registrable shares will have the right to require us to register all or a portion of the registrable shares then held by them. In the event that any registration in which the holders of registrable shares participate pursuant to the registration rights agreement is an underwritten public offering, the number of registrable shares to be included may, in specified circumstances, be limited due to market conditions.

      The registration rights described in the investor rights agreement are subject to customary restrictions such as minimums, blackout periods and, if a registration is underwritten, any limitations on the number of shares to be included in the underwritten offering imposed by the managing underwriter. The investor rights agreement also contains customary indemnification and contribution provisions.

      All expenses of registration under the investor rights agreement, including the legal fees of one counsel for the holders, but excluding underwriting discounts and commission will be paid by us. The investor rights agreement is governed by Delaware law.

Anti-Takeover Effects of Provisions of Delaware Law and Our Charter and Bylaws

      We have elected to be governed by the provisions of Section 203 of Delaware General Corporation Law, which generally will have an anti-takeover effect for transactions not approved in advance by our board of directors, including discouraging attempts that might result in a premium over the market price for our common stock. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a three-year period following the time that the stockholder becomes an interested stockholder, unless the business combination is approved in a prescribed manner. A “business combination” includes, among other things, a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. An

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“interested stockholder” is a person who, together with affiliates and associates, owns, or did own within three years prior to the determination of interested stockholder status, 15% or more of the corporation’s voting stock. Under Section 203, a business combination between a corporation and an interested stockholder is prohibited unless it satisfies one of the following conditions:

•  before the stockholder became interested, the board of directors approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder;

•  upon consummation of 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 voting stock outstanding, shares owned by persons who are directors and also officers, and employee stock plans, in some instances; or

•  at or after the time the stockholder became interested, the business combination was approved by the board and authorized at a stockholder meeting by the affirmative vote of at least two-thirds of the outstanding voting stock not owned by the interested stockholder.

      Our charter and bylaws provide that directors may be removed only for cause and then only by the affirmative vote of the holders of a majority of the votes that all stockholders would be entitled to cast in any annual election of directors. Vacancies on our board resulting from such removal may be filled by (i) a majority of the directors then in office, though less than a quorum, or (ii) the stockholders at a special meeting of the stockholders properly called for that purpose, by the vote of the holders of a plurality of the shares entitled to vote at such special meeting. Under our bylaws, any vacancy on our board of directors resulting from an enlargement of our board or the death, resignation, retirement, disqualification or other cause (other than removal for cause or vote of our stockholders), may only be filled by vote of a majority of our directors then in office, even if less than a quorum. The limitations on the removal of directors and filling of vacancies could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of us.

      Our charter provides that stockholders may not take any action by written consent in lieu of a meeting and our bylaws limit the business that may be conducted at an annual meeting of stockholders to those matters properly brought before the meeting. In addition, our bylaws provide that only our board of directors or our chairman or president may call a special meeting of stockholders. Business transacted at any special meeting of stockholders must be limited to matters relating to the purpose stated in the notice of the special meeting.

      To be “properly brought” before an annual meeting, the proposals or nominations must be:

•  specified in the notice of meeting;

•  brought before the meeting by or at the direction of our board of directors; or

•  brought before the meeting by a stockholder entitled to vote at the meeting who has given to our corporate secretary the required advance written notice, in proper form, of the stockholder’s intention to bring that proposal or nomination before the meeting and who was a stockholder of record on the date on which notice is given.

      In addition to other applicable requirements, for a stockholder proposal or nomination to be properly brought before an annual meeting by a stockholder, the stockholder generally must have given notice in proper written form to our corporate secretary not less than 90 days nor more than 120 days prior to the first anniversary of the preceding year’s annual meeting of stockholders. In the event that no annual meeting was held in the previous year or the annual

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meeting is called for a date that is not within 30 days from the anniversary date of the preceding year’s annual meeting date, written notice by a stockholder in order to be timely must be received not later than the 10th day following the day on which the first public disclosure of the date of the annual meeting was made. Although our bylaws do not give our board of directors the power to approve or disapprove stockholder nominations of candidates or proposals regarding other business to be conducted at a special or annual meeting, our bylaws may have the effect of precluding the consideration of some business at a meeting if the proper procedures are not followed or may discourage or defer a potential acquiror from conducting a solicitation of proxies to elect its own slate of directors or otherwise attempting to obtain control of us.

      Delaware law provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation’s charter or bylaws, unless the charter or bylaws require a greater percentage. Our bylaws may be amended or repealed by a majority vote of our board of directors, subject to any limitations set forth in the bylaws, and may also be amended or repealed by the stockholders by the affirmative vote of the holders of a majority of the votes that all the stockholders would be entitled to cast in any annual election of directors. The majority stockholder vote would be in addition to any separate class vote that might in the future be required pursuant to the terms of any series of preferred stock that might be outstanding at the time any of these amendments are submitted to stockholders.

Liability Limitations and Indemnification

      Our bylaws provide that we must indemnify our directors and officers and that we must advance expenses, including attorneys’ fees, to our directors and officers in connection with legal proceedings, subject to very limited exceptions. In addition, our charter provides that our directors will not be personally liable for monetary damages to us for breaches of their fiduciary duty as directors, except to the extent that the Delaware law statute prohibits the elimination or limitation of liability of directors for breaches of fiduciary duty. For additional information, please see “Management — Liability Limitations and Indemnification.”

      These provisions may discourage stockholders from bringing a lawsuit against our directors for breach of their fiduciary duties. These provisions may also have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our stockholders. Furthermore, you may lose some or all of your investment in our common stock if we pay the costs of settlement or damage awards against our directors and officers under these provisions. We believe these provisions, the director and officer insurance we maintain, and the indemnification agreements we have entered into with our directors and officers are necessary to attract and retain talented and experienced directors and officers.

Transfer Agent and Registrar

      The transfer agent and registrar for our common stock is           .

Listing

      Application will be made for the quotation of our common stock on the Nasdaq National Market under the symbol “REST.”

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SHARES ELIGIBLE FOR FUTURE SALE

      Prior to the offering made by this prospectus, there has been no market for our common stock, and we cannot assure you that a liquid trading market for our common stock will develop or be sustained after this offering. Future sales of substantial numbers of shares of our common stock, including shares issued upon exercise of options, in the public market after this offering, or the anticipation of those sales, could adversely affect market prices of our common stock prevailing from time to time and could impair our ability to raise capital through sales of our equity securities.

      Upon completion of this offering, we will have outstanding  shares of common stock, after giving effect to the conversion of all outstanding shares of our preferred stock into an aggregate of 10,395,299 shares of common stock prior to the completion of this offering.

      The           shares sold in this offering will be freely tradable without restriction under the Securities Act unless purchased by our “affiliates,” as that term is defined in Rule 144 under the Securities Act. The remaining shares of common stock to be outstanding after this offering will be “restricted securities” under Rule 144. Substantially all of these restricted securities will be subject to the 180-day lock-up period (subject to extension in specified circumstances) described below. Immediately after the 180-day period,           shares will be freely tradeable under Rule 144(k) and           additional shares will be eligible for resale under Rule 144, subject to volume limitations.

      Restricted securities may be sold in the public market only if they have been registered or if they qualify for an exemption from registration under Rule 144 or 701 under the Securities Act.

Rule 144

      In general, under Rule 144, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of:

•  1% of the number of shares of 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 National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale.

      Sales under Rule 144 are also subject to manner of sale provisions, notice requirements and the availability of current public information about us.

Rule 144(k)

      Subject to the lock-up agreements described below, shares of our common stock eligible for sale under Rule 144(k) may be sold immediately upon the completion of this offering. In general, under Rule 144(k), a person may sell shares of common stock acquired from us immediately upon completion of this offering, without regard to the manner or volume of sale or the availability of public information about us, if:

•  the person is not our affiliate and has not been our affiliate at any time during the three months preceding such a sale; and

•  the person has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate.

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Rule 701

      In general, under Rule 701 of the Securities Act, any of our employees, consultants or advisors who purchased shares from us in connection with a qualified compensatory stock plan or other written agreement is eligible to resell those shares 90 days after the date of this prospectus in reliance on Rule 144, but without compliance with the holding period or certain other restrictions contained in Rule 144.

Lock-up Agreements

      Each of our officers and directors, and all of our other stockholders and holders of options to purchase our common stock, have agreed not to offer, sell, contract to sell or otherwise dispose of, or enter into any transaction that is designed to, or could be expected to, result in the disposition of any shares of our common stock or other securities convertible into or exchangeable or exercisable for shares of our common stock or derivatives of our common stock owned by these persons prior to this offering or common stock issuable upon exercise of options held by these persons for a period of 180 days after the date of this prospectus without the prior written consent of Deutsche Bank Securities Inc., subject to extension in specified circumstances.

      Deutsche Bank Securities Inc. does not have any pre-established conditions to waiving the terms of the lock-up agreements. Any determination to release any shares subject to the lock-up agreements would be based on a number of factors at the time of determination, including but not necessarily limited to the market price of the common stock, the liquidity of the trading market for the common stock, general market conditions, the number of shares proposed to be sold and the timing, purpose and terms of the proposed sale.

Registration Rights

      After this offering, holders of 10,730,462 shares of our common stock, including shares that are issuable upon the exercise of outstanding warrants, will have the right to require us to register these shares under the Securities Act under specific circumstances. After registration pursuant to these rights, these shares will become freely tradable without restriction under the Securities Act. See “Description of Capital Stock — Registration Rights.”

Equity Plans

      As of March 3, 2006, we had outstanding options to purchase 1,405,862 shares of our common stock. Following this offering, we intend to file registration statements on Form S-8 under the Securities Act to register all of the shares of common stock issued or issuable under our 1999 plan.

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MATERIAL US FEDERAL TAX CONSEQUENCES

FOR NON-US HOLDERS OF OUR COMMON STOCK

      The following is a general discussion of the material US federal income and estate tax considerations applicable to non-US holders with respect to their ownership and disposition of shares of our common stock purchased in this offering. This discussion is for general information only and is not tax advice. Accordingly, all prospective non-US holders of our common stock should consult their own tax advisors with respect to the US federal, state, local and non-US tax consequences of the purchase, ownership and disposition of our common stock. In general, a non-US holder means a beneficial owner of our common stock who is not for US federal income tax purposes:

•  an individual who is a citizen or resident of the US;

•  a corporation, partnership or any other organization taxable as a corporation or partnership for US federal tax purposes, created or organized in the US or under the laws of the US or of any state thereof or the District of Columbia; or

•  an estate, the income of which is included in gross income for US federal income tax purposes regardless of its source; or

•  a trust if (a) a US court is able to exercise primary supervision over the trust’s administration and (b) one or more US persons have the authority to control all of the trust’s substantial decisions.

      This discussion is based on current provisions of the US Internal Revenue Code of 1986, as amended, existing and proposed US Treasury Regulations promulgated thereunder, current administrative rulings and judicial decisions, in effect as of the date of this prospectus, all of which are subject to change or to differing interpretation, possibly with retroactive effect. Any change could alter the tax consequences to non-US holders described in this prospectus. We assume in this discussion that a non-US holder holds shares of our common stock as a capital asset (generally property held for investment).

      This discussion does not address all aspects of US federal income and estate taxation that may be relevant to a particular non-US holder in light of that non-US holder’s individual circumstances, nor does it address any aspects of US state or local or non-US taxes. This discussion also does not consider any specific facts or circumstances that may apply to a non-US holder and does not address the special tax rules applicable to particular non-US holders, such as:

•  insurance companies;

•  tax-exempt organizations;

•  financial institutions;

•  brokers or dealers in securities;

•  partnerships or other pass-through entities;

•  regulated investment companies or real estate investment trusts;

•  pension plans;

•  owners of more than 5% of our common stock;

•  owners that hold our common stock as part of a straddle, hedge, conversion transaction, synthetic security or other integrated investment; and

•  certain US expatriates.

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      There can be no assurance that the Internal Revenue Service, or IRS, will not challenge one or more of the tax consequences described herein, and we have not obtained, nor do we intend to obtain, an opinion of counsel with respect to the US federal income or estate tax consequences to a non-US holder of the purchase, ownership or disposition of our common stock. We urge prospective investors to consult with their own tax advisors regarding the US federal, state and local and non-US income and other tax considerations of purchasing, owning and disposing of shares of our common stock.

Distributions on Our Common Stock

      Any distributions on our common stock paid to non-US holders of common stock generally will constitute dividends for US federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under US federal income tax principles. If a distribution exceeds our current and accumulated earnings and profits, the excess will be treated as a tax-free return of the non-US holder’s investment, up to such holder’s tax basis in the common stock. Any remaining excess will be treated as capital gain, subject to the tax treatment described below in “— Gain on Sale, Exchange or Other Disposition of Our Common Stock.” Dividends paid to a non-US holder generally will be subject to withholding of US federal income tax at a 30% rate or such lower rate as may be provided by an applicable income tax treaty between the US and such holder’s country of residence.

      Dividends that are treated as effectively connected with a trade or business conducted by a non-US holder within the US (and if an applicable income tax treaty so provides, are also attributable to a permanent establishment or a fixed base maintained within the US by such non-US holder) are generally exempt from the 30% withholding tax if the non-US holder satisfies applicable certification and disclosure requirements. However, such US effectively connected income, net of specified deductions and credits, is taxed at the same graduated US federal income tax rates applicable to US persons. Any US effectively connected income received by a non-US holder that is a corporation may also, under certain circumstances, be subject to an additional branch profits tax at a 30% rate or such lower rate as specified by an applicable income tax treaty between the US and such holder’s country of residence.

      In order to claim the benefit of a tax treaty or to claim exemption from withholding because dividends paid on our common stock are effectively connected with the conduct of a trade or business in the US, a non-US holder must provide a properly executed IRS Form W-8BEN for treaty benefits or W-8ECI for effectively connected income, or such successor forms as the IRS designates, prior to the payment of dividends. These forms must be periodically updated. Non-US holders may be eligible to obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS.

Gain On Sale, Exchange or Other Disposition of Our Common Stock

      In general, a non-US holder will not be subject to any US federal income tax or withholding tax on any gain realized upon such holder’s sale, exchange or other disposition of shares of our common stock unless:

•  the gain is effectively connected with a US trade or business (and if an applicable income tax treaty so provides, is also attributable to a permanent establishment or a fixed base maintained within the US by such non-US holder), in which case the graduated US federal income tax rates applicable to US persons will apply, and, if the non-US holder is a foreign corporation, the additional branch profits tax described above in “— Distributions on Our Common Stock” may also apply;

•  the non-US holder is a nonresident alien individual who is present in the US for 183 days or more in the taxable year of the disposition and certain other conditions are met, in which case the non-US holder will be subject to a 30% tax on the net gain derived from

87

the disposition, which may be offset by US-source capital losses of the non-US holder, if any; or

•

we are or have been, at any time during the five-year period preceding such disposition (or the non-US holder’s holding period if shorter) a “US real property holding corporation,” and our common stock has ceased to be traded on an established securities market prior to the beginning of the calendar year in which the disposition occurs. We believe that we have not been and are not currently, and we do not anticipate becoming in the future, a “US real property holding corporation” for US federal income tax purposes.

US Federal Estate Tax

      Shares of our common stock that are owned or treated as owned by an individual non-US holder at the time of death are considered US situs assets and will be included in the individual’s gross estate for US federal estate tax purposes. Such shares, therefore, may be subject to US federal estate tax, unless an applicable estate tax or other treaty provides otherwise.

Backup Withholding and Information Reporting

      We must report annually to the IRS and to each non-US holder the gross amount of the distributions on our common stock paid to such holder and the tax withheld, if any, with respect to such distributions. Backup withholding, currently at a 28% rate of tax, generally will not apply to dividends paid to a non-US holder if the holder has provided us with an IRS Form W-8 BEN (or successor form), described above, and we do not have actual knowledge or reason to know that such non-US holder is a US person. In addition, no backup withholding or information reporting will be required regarding the proceeds of a disposition of our common stock made by a non-US holder within the US or conducted through certain US financial intermediaries if the payor receives the statement described above and does not have actual knowledge or reason to know that such non-US holder is a US person or the non-US holder otherwise establishes an exemption. Non-US holders should consult their own tax advisors regarding the application of the information reporting and backup withholding rules to them.

      Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment to a non-US holder can be refunded or credited against the non-US holder’s United States federal income tax liability, if any, provided that an appropriate claim is timely filed with the IRS.

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UNDERWRITING

      Subject to the terms and conditions of the underwriting agreement, the underwriters named below, through their representatives Deutsche Bank Securities Inc., RBC Capital Markets Corp. and First Albany Capital Inc. have severally agreed to purchase from us the following respective number of shares of common stock at a public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus:

		Number of
Underwriters		Shares
Deutsche Bank Securities Inc.
RBC Capital Markets Corp.
First Albany Capital Inc.
	Total

      The underwriting agreement provides that the obligations of the several underwriters to purchase the shares of common stock offered hereby are subject to certain conditions precedent and that the underwriters will purchase all of the shares of common stock offered by this prospectus, other than those covered by the over-allotment option described below, if any of these shares are purchased.

Discounts and Commissions

      We have been advised by the representatives of the underwriters that the underwriters propose to offer the shares of common stock to the public at the public offering price set forth on the cover of this prospectus and to dealers at a price that represents a concession not in excess of $           per share under the public offering price. The underwriters may allow, and these dealers may re-allow, a concession of not more than $           per share to other dealers. After the initial public offering, representatives of the underwriters may change the offering price and other selling terms.

      The underwriting discounts and commissions per share are equal to the public offering price per share of common stock less the amount paid by the underwriters to us per share of common stock. The underwriting discounts and commissions are           % of the initial public offering price. We have agreed to pay the underwriters the following discounts and commissions, assuming either no exercise or full exercise by the underwriters of the underwriters’ over-allotment option:

		Without Exercise	With Full Exercise
		of Over-	of Over-Allotment
	Per Share	Allotment Option	Option
Public Offering Price	$	$	$
Discounts and commissions paid by us	$	$	$
Proceeds, before expenses, to us	$	$	$

      In addition, we estimate that our share of the total expenses of this offering, excluding underwriting discounts and commissions, will be approximately $          .

Over-Allotment Option

      We have granted to the underwriters an option, exercisable not later than 30 days after the date of this prospectus, to purchase up to  additional shares of common stock at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus. The underwriters may exercise this option only to cover over-allotments made in connection with the sale of the common stock offered by this prospectus. To the extent that the underwriters exercise this option, each of the underwriters will become obligated, subject to conditions, to purchase approximately the same percentage of these additional shares of

89

common stock as the number of shares of common stock to be purchased by it in the above table bears to the total number of shares of common stock offered by this prospectus. We will be obligated, pursuant to the option, to sell these additional shares of common stock to the underwriters to the extent the option is exercised. If any additional shares of common stock are purchased, the underwriters will offer the additional shares on the same terms as those on which the           shares are being offered.

Indemnification

      We have agreed to indemnify the underwriters against some specified types of liabilities, including liabilities under the Securities Act, and to contribute to payments the underwriters may be required to make in respect of any of these liabilities.

No Sales of Similar Securities

      Each of our officers and directors, and all of our other stockholders and holders of options to purchase our common stock, have agreed not to offer, sell, contract to sell or otherwise dispose of, or enter into any transaction that is designed to, or could be expected to, result in the disposition of any shares of our common stock or other securities convertible into or exchangeable or exercisable for shares of our common stock or derivatives of our common stock owned by these persons prior to this offering or common stock issuable upon exercise of options held by these persons for a period of 180 days after the date of this prospectus without the prior written consent of Deutsche Bank Securities Inc., subject to extension in specified circumstances. This consent may be given at any time without public notice. Transfers or dispositions can be made during the lock-up period in the case of gifts or for estate planning purposes where the donee signs a lock-up agreement. We have entered into a similar agreement with the representatives of the underwriters except that without such consent we may grant options or issue shares pursuant to our equity incentive plans. There are no agreements between the representatives and any of our stockholders or affiliates releasing them from these lock-up agreements prior to the expiration of the lock-up period.

      The representatives of the underwriters have advised us that the underwriters do not intend to confirm sales to any account over which they exercise discretionary authority.

Price Stabilizations; Short Positions

      In connection with this offering, the underwriters may purchase and sell shares of our common stock in the open market. These transactions may include short sales, purchases to cover positions created by short sales and stabilizing transactions.

      Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in this offering. Covered short sales are sales made in an amount not greater than the underwriters’ option to purchase additional shares of common stock from us in this offering. The underwriters may close out any covered short position by either exercising their option to purchase additional shares or by purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option.

      Naked short sales are any sales in excess of the over-allotment option. The underwriters 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 underwriters are concerned that there may be downward pressure on the price of the shares in the open market prior to the completion of this offering.

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      Stabilizing transactions consist of various bids for or purchases of our common stock made by the underwriters in the open market prior to the completion of this offering.

      The underwriters may impose a penalty bid. This occurs when a particular underwriter repays to the other underwriters a portion of the underwriting discount received by it because the representatives of the underwriters have repurchased shares sold by or for the account of that underwriter in stabilizing or short covering transactions.

      Purchases to cover a short position and stabilizing transactions may have the effect of preventing or slowing a decline in the market price of our common stock. Additionally, these purchases, along with the imposition of the penalty bid, may stabilize, maintain or otherwise affect the market price of our common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the Nasdaq National Market, in the over-the-counter market or otherwise.

Passive Market Making

      In connection with this offering, the underwriters may engage in passive market-making transactions in our common stock on the Nasdaq National Market in accordance with Rule 103 of Regulation M under the Securities Exchange Act during a period before the commencement of offers or sales of common stock and extending through the completion of distribution. A passive market maker must display its bid at a price not in excess of the highest independent bid of that security. However, if all independent bids are lowered below the passive market maker’s bid, that bid must then be lowered when specified purchase limits are exceeded.

      A prospectus in electronic format is being made available on Internet websites maintained by one or more of the representatives of the underwriters of this offering and may be made available on websites maintained by other underwriters. Other than the prospectus in electronic format, the information on any underwriter’s website and any information contained in any other website maintained by an underwriter is not part of this prospectus or the registration statement of which this prospectus forms a part.

Pricing of this Offering

      Prior to this offering, there has been no public market for our common stock. Consequently, the initial public offering price of our common stock will be determined by negotiation among the representatives of the underwriters and us. Among the primary factors that will be considered in determining the public offering price are:

•  prevailing market conditions;

•  our results of operations in recent periods;

•  the present stage of our development;

•  the market capitalizations and stages of development of other companies that we and the representatives of the underwriters believe to be comparable to our business; and

•  estimates of our business potential.

Listing of Our Common Stock

      Application will be made for listing of our common stock on the NASDAQ National Market under the symbol “REST.”

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LEGAL MATTERS

      Dorsey & Whitney LLP will pass upon the validity of the shares of common stock offered by this prospectus. Skadden, Arps, Slate, Meager & Flom LLP will act as counsel for the underwriters.

EXPERTS

      The financial statements of Restore Medical, Inc. as of December 31, 2005 and 2004, and for each of the years in the three-year period ended December 31, 2005, have been included herein and in the registration statement in reliance upon the report of KPMG LLP, independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.

      KPMG LLP’s audit report contains explanatory paragraphs stating that the financial statements as of December 31, 2003 and as of and for the year ended December 31, 2004 have been restated, and that we changed our method of accounting for preferred stock warrants subject to redemption upon the adoption of Statement of Financial Accounting Standard No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity on July 1, 2003.

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 completion 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.restoremedical.com as soon as reasonably practicable after filing such documents with the SEC.

      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 also read and copy any document we file with the SEC at its public reference facility at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities.

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RESTORE MEDICAL, INC.

INDEX TO FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm	F-2
Financial Statements of Restore Medical, Inc.:
Balance Sheets	F-3
Statements of Operations	F-4
Statements of Stockholders’ Deficit	F-5
Statements of Cash Flows	F-6
Notes to Financial Statements	F-7

F-1

When the common stock reverse split referred to in Note 17 of the Notes to Financial Statements has been consummated, we will be in a position to render the following report:

/s/ KPMG LLP

Report of Independent Registered Public Accounting Firm

The Board of Directors

Restore Medical, Inc.:

      We have audited the accompanying balance sheets of Restore Medical, Inc. as of December 31, 2004 and 2005 and the related statements of operations, stockholders’ deficit, and cash flows for each of the years in the three-year period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

      We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Restore Medical, Inc. as of December 31, 2004 and 2005, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2005 in conformity with U.S. generally accepted accounting principles.

      As discussed in Note 2 to the financial statements, the Company has restated its financial statements for the year ended December 31, 2003 and as of and for the year ended December 31, 2004.

      As discussed in note 1(v), on July 1, 2003 the Company changed its method for accounting for preferred warrants subject to redemption upon the adoption of Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.

Minneapolis, Minnesota

March 6, 2006, except as to

Note 17 which is as of                     

F-2

RESTORE MEDICAL, INC.

BALANCE SHEETS

December 31, 2004 and 2005

			2004
			(Restated)			2005
ASSETS
Current assets:
	Cash and cash equivalents		$	2,258,270		$	3,396,577
	Short-term investments			6,174,007			247,734
	Accounts receivable, net of allowance for doubtful accounts of $11,910 and $59,897, respectively			274,008			1,239,885
	Related-party receivables			73,780			27,566
	Inventories			415,563			743,724
	Prepaid expenses			96,474			116,428
	Other current assets			4,599			54,127
		Total current assets		9,296,701			5,826,041
Machinery and equipment, net				361,937			425,909
Deferred debt issuance costs, net of accumulated amortization of $20,905 in 2005				—			80,740
Deferred offering costs				—			62,055
		Total assets	$	9,658,638		$	6,394,745
LIABILITIES, CONVERTIBLE PARTICIPATING PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT
Current liabilities:
	Accounts payable		$	106,108		$	111,631
	Accrued expenses			470,909			645,451
	Accrued payroll and related expense			397,144			673,047
	Current portion of long-term debt, net of debt discount of $22,351 in 2005			—			337,536
		Total current liabilities		974,161			1,767,665
Long-term debt, net of debt discount of $44,701 in 2005				—			1,619,011
Other long-term liabilities				—			6,900
Preferred stock warrants subject to redemption				94,284			835,127
		Total liabilities		1,068,445			4,228,703
Commitments and contingencies (notes 14 and 15)
Convertible participating preferred stock:
	Series A, $0.01 par value. Authorized 775,000 shares; issued and outstanding 750,000 shares (liquidation value of $750,000)			747,380			747,380
	Series B, $0.01 par value. Authorized 4,500,000 shares; issued and outstanding 4,185,411 shares (liquidation value of $12,556,233)			13,507,461			13,507,461
	Series C, $0.01 par value. Authorized 9,500,000 shares; issued and outstanding 7,615,675 shares (liquidation value of $39,906,137)			18,723,137			18,723,137
	Series C-1, $0.01 par value. Authorized 2,940,000 shares; issued and outstanding 2,498,833 shares (liquidation value of $13,093,884)			6,230,879			6,230,879
		Total convertible participating preferred stock		39,208,857			39,208,857
Common stockholders’ deficit:
	Undesignated stock, $0.01 par value. Authorized 2,000,000 shares, none outstanding			—			—
	Common stock $0.01 par value. Authorized 23,500,000 shares; issued and outstanding 821,712 and 855,676 shares respectively			8,217			8,557
	Additional paid-in capital			652,608			3,187,885
	Deferred stock-based compensation			(166,185	)		(2,104,753	)
	Accumulated deficit			(31,113,304	)		(38,134,504	)
		Total common stockholders’ deficit		(30,618,664	)		(37,042,815	)
		Total liabilities, convertible participating preferred stock and stockholders’ deficit	$	9,658,638		$	6,394,745

See accompanying notes to financial statements.

F-3

RESTORE MEDICAL, INC.

STATEMENTS OF OPERATIONS

Years Ended December 31, 2003, 2004 and 2005

			2003			2004
			(Restated)			(Restated)			2005
Net sales			$	368,201		$	944,816		$	4,854,235
Cost of sales				412,316			790,805			1,641,390
	Gross margin (loss)			(44,115	)		154,011			3,212,845
Operating expenses:
	Research and development			3,300,904			2,281,880			1,869,264
	General and administrative			2,002,956			2,148,276			2,938,237
	Sales and marketing			2,332,716			4,039,447			4,981,024
		Total operating expenses		7,636,576			8,469,603			9,788,525
		Loss from operations		(7,680,691	)		(8,315,592	)		(6,575,680	)
Other income (expense):
	Interest income			32,147			169,072			132,421
	Interest expense			(2,659,735	)		(426,120	)		(24,816	)
	Put option gain			638,508			870,692			—
	Preferred stock warrant gain (loss)			9,278			128,465			(572,023	)
	Other, net			(17,972	)		19,256			18,898
		Total other income (expense)		(1,997,774	)		761,365			(445,520	)
		Loss before cumulative effect of change in accounting principle		(9,678,465	)		(7,554,227	)		(7,021,200	)
Cumulative effect of change in accounting principle				266,989			—			—
		Net loss		(9,411,476	)		(7,554,227	)		(7,021,200	)
Amortization of beneficial conversion feature of Series A and B preferred stock				(44,941	)		(251,806	)		—
		Net loss attributable to common stockholders	$	(9,456,417	)	$	(7,806,033	)	$	(7,021,200	)
Basic and diluted net loss per common share before cumulative effect of change in accounting principle			$	(11.74	)	$	(6.52	)	$	(5.73	)
Cumulative effect of change in accounting principle per share				0.32			—			—
		Basic and diluted net loss per share	$	(11.42	)	$	(6.52	)	$	(5.73	)
Basic and diluted weighted average common shares outstanding				827,819			1,196,366			1,224,350

See accompanying notes to financial statements.

F-4

RESTORE MEDICAL, INC.

STATEMENTS OF STOCKHOLDERS’ DEFICIT

Years Ended December 31, 2003, 2004 and 2005

	Common Stock				Additional			Deferred						Total
					Paid-In			Stock-Based			Accumulated			Stockholders’
	Shares		Amount		Capital			Compensation			Deficit			Deficit
Balance, December 31, 2002		752,937	$	7,529	$	175,334		$	—		$	(13,302,375	)	$	(13,119,512	)
Restatement adjustments		—		—		(175,334	)		—			(845,226	)		(1,020,560	)
Balance, December 31, 2002 (restated)		752,937		7,529		—			—			(14,147,601	)		(14,140,072	)
Net loss (restated)		—		—		—			—			(9,411,476	)		(9,411,476	)
Beneficial conversion feature of Series A and B preferred stock (restated)		—		—		296,747			—			—			296,747
Amortization of beneficial conversion feature of Series A and B preferred stock (restated)		—		—		(44,941	)		—			—			(44,941	)
Stock options exercised		64,324		644		67,314			—			—			67,958
Common stock warrants issued in connection with debt financings (restated)		—		—		374,083			—			—			374,083
Balance, December 31, 2003 (restated)		817,261		8,173		693,203			—			(23,559,077	)		(22,857,701	)
Net loss (restated)		—		—		—			—			(7,554,227	)		(7,554,227	)
Amortization of beneficial conversion feature of Series A and B preferred stock (restated)		—		—		(251,806	)		—			—			(251,806	)
Stock options exercised		4,451		44		5,543			—			—			5,587
Changes to deferred compensation (restated)		—		—		205,668			(166,185	)		—			39,483
Balance, December 31, 2004 (restated)		821,712		8,217		652,608			(166,185	)		(31,113,304	)		(30,618,664	)
Net loss		—		—		—			—			(7,021,200	)		(7,021,200	)
Stock options exercised		33,964		340		37,125			—			—			37,465
Changes to deferred compensation		—		—		2,498,152			(1,938,568	)		—			559,584
Balance, December 31, 2005		855,676	$	8,557	$	3,187,885		$	(2,104,753	)	$	(38,134,504	)	$	(37,042,815	)

See accompanying notes to financial statements.

F-5

RESTORE MEDICAL, INC.

STATEMENTS OF CASH FLOWS

Years Ended December 31, 2003, 2004 and 2005

				2003			2004
				(Restated)			(Restated)			2005
Cash flows from operating activities:
	Net loss			$	(9,411,476	)	$	(7,554,227	)	$	(7,021,200	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization			83,395			111,205			169,256
		Stock-based compensation			—			39,483			559,584
		Put option gain			(638,508	)		(870,692	)		—
		Preferred stock warrant (gain) loss			(9,278	)		(128,465	)		572,023
		Bad debt expense			6,000			14,310			62,209
		Non-cash interest expense			2,530,651			337,726			21,027
		Cumulative effect of change in accounting principle			(266,989	)		—			—
	Change in operating assets and liabilities:
		Trade receivables			(133,547	)		(160,771	)		(1,028,086	)
		Related-party receivables			10,308			56,649			46,488
		Inventories			(171,634	)		(128,063	)		(328,161	)
		Prepaid expenses			59,562			(3,435	)		(19,954	)
		Other current assets			—			(4,599	)		(49,802	)
		Accounts payable			179,839			(111,301	)		5,523
		Accrued expenses			139,332			(193,698	)		174,542
		Accrued payroll and related expenses			94,191			267,262			275,903
		Other long-term liabilities			—			—			6,900
			Net cash used in operating activities		(7,528,154	)		(8,328,616	)		(6,553,748	)
Cash flows from investing activities:
	Maturities of short-term investments				—			—			13,212,679
	Purchase of short-term investments				—			(6,174,007	)		(7,286,406	)
	Purchases of machinery and equipment				(197,916	)		(159,895	)		(208,328	)
	Sales of machinery and equipment				13,463			—			—
			Net cash provided by (used in) investing activities		(184,453	)		(6,333,902	)		5,717,945
Cash flows from financing activities:
	Proceeds from issuance of long-term debt				1,000,000			—			2,000,000
	Increase in deferred offering costs				—			—			(62,055	)
	Capital lease payments				—			—			(1,300	)
	Proceeds from stock options exercised				67,958			5,587			37,465
	Proceeds from issuance of convertible notes payable				5,374,462			—			—
	Proceeds from sale of Series C and C-1 preferred stocks, net of financing costs and note conversion				—			18,576,983			—
	Repayments on long-term debt				(58,990	)		(2,514,364	)		—
			Net cash provided by financing activities		6,383,430			16,068,206			1,974,110
			Net increase (decrease) in cash and cash equivalents		(1,329,177	)		1,405,688			1,138,307
Cash and cash equivalents:
	Beginning of year				2,181,759			852,582			2,258,270
	End of year			$	852,582		$	2,258,270		$	3,396,577
Supplemental disclosure:
	Interest paid			$	129,084		$	88,394		$	3,789
Noncash investing and financing activities:
	Value of common stock warrants issued with debt				229,135			—			—
	Value of preferred stock warrants issued with debt				—			—			168,820
	Value of common stock warrants issued for debt modification				144,948			—			—
	Value of preferred stock warrants issued for debt guarantee				155,307			—			—
	Capital lease financing				—			—			24,899
	Conversion of notes payable to Series C-1 preferred stock				—			5,879,536			—
	Conversion of interest payable to Series C-1 preferred stock				—			497,497			—

See accompanying notes to financial statements.

F-6

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2003, 2004 and 2005

(1) Summary of Significant Accounting Policies

     (a) Nature of Business

      Restore Medical, Inc. (the Company) develops and markets medical devices designed to treat sleep breathing disorders. In December 2002, the Company received Food and Drug Administration (FDA) 510(k) clearance to market and sell the Pillar^® palatal implant system (Pillar System) in the United States for the treatment of snoring. The Company received 510(k) clearance from the FDA in July 2004 to market and sell its Pillar System in the United States for mild to moderate obstructive sleep apnea (OSA). The Company received CE Mark certification to market and sell its Pillar System in Europe for snoring in May 2003 and for OSA in December 2004. The Company markets and sells its products domestically through a direct sales force and internationally through independent distributors, except in Germany, where the Company sells directly to certain physician customers.

     (b) Reclassifications

      Certain reclassifications have been made to the 2003 and 2004 financial statements to conform to the 2005 presentation, including the reclassification of preferred stock from permanent equity to mezzanine equity to conform the financial statement presentation to that of a publicly-held company.

     (c) Use of Estimates

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

     (d) Fair Value of Financial Instruments

      The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

      Short-term investments and related-party receivables—The carrying amount approximates fair value due to the short maturity of the instruments.

      Long-Term Debt—Due to the recent nature of the debt agreement and borrowings as of December 31, 2005; the borrowing rates, loan terms and maturity date reflect the current market value of debt issued to the Company. Accordingly, the carrying amount approximates fair value of this instrument.

      Warrants Subject to Redemption—As further described in note 12, the Company records adjustments to the carrying amount of the warrants to reflect the fair value of the warrants as of the balance sheet date, based upon an independent valuation of the warrants. Accordingly, the carrying amount reflects the appraised fair value of this instrument.

     (e) Cash and Cash Equivalents

      The Company considers highly liquid investments with original maturities of 90 days or less to be cash equivalents. Cash equivalents are stated at cost, which approximates market value. The Company’s cash equivalents are primarily invested in commercial paper, money market

F-7

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

funds, and US government-backed securities. The Company performs periodic evaluations of the relative credit standing of the financial institutions and issuers of its cash equivalents and limits the amount of credit exposure with any one issuer.

     (f) Investments in Debt and Equity Securities

      At December 31, 2005, debt securities are classified as held-to-maturity due to the Company’s intent and ability to hold such securities to maturity. Debt or preferred stock securities subject to periodic interest rate resetting and, in the case of debt instruments, often referred to as Auction Rate Notes or Variable Rate Demand Notes, are excluded from cash equivalents and accounted for as available-for-sale investments. The carrying value of these instruments approximates fair market value. Declines in value of debt or equity securities classified as either available-for-sale or held-to-maturity are considered to be temporary. Maturities of all debt securities classified as available-for-sale and held-to-maturity were less than one year at December 31, 2004 and 2005. Investments in debt and equity securities were comprised as follows:

		2004
		(Restated)		2005
Held-to-maturity:
	Corporate debt securities	$	1,990,913	$	247,734
	Mortgage-backed securities		1,683,094		—
	Certificates of deposit		1,400,000		—
Available-for-sale:
	Equity securities		1,100,000		—
		$	6,174,007	$	247,734

     (g) Inventories

      Inventories consist of material, labor, and overhead costs and are stated at the lower of cost or market value, determined under the first-in, first-out accounting method. Inventories at December 31, 2004 and 2005 were as follows:

	2004
	(Restated)		2005
Raw materials	$	142,698	$	113,241
Work in progress		235,590		371,768
Finished goods		37,275		258,715
	$	415,563	$	743,724

     (h) Machinery and Equipment

      Machinery and equipment is recorded at cost and depreciated utilizing the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements are amortized over the shorter of the useful life of the assets or term of the lease. Repairs and maintenance are expensed as incurred.

F-8

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

     (i) Impairment of Long-Lived Assets

      Long-lived assets, such as machinery 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 undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

     (j) Deferred Offering Costs

      The Company has deferred external costs associated with its planned initial public offering in 2006, at which time the costs will be charged against the capital raised. Should the offering be terminated, the costs immediately will be charged to operations.

     (k) Revenue Recognition

      Revenues are recognized when evidence of an arrangement exists, delivery to the customer has occurred, the selling price is fixed or determinable and collection is reasonably assured. Delivery to the customer occurs when the customer takes title to the product. Generally title passes upon shipment, but may occur when the product is received by the customer based on specific sales terms. Estimated warranty obligations are recorded upon shipment as cost of sales.

      In the United States, the Company sells its products to physicians through a direct sales force. The selling price for all sales are fixed and agreed with the customer prior to shipment and are generally based on established price lists.

      The Company sells its products internationally through independent distributors, except in Germany where the Company sells directly to certain physician customers. Selling prices are contractual for distributors and are denominated in US dollars. Distributor contracts also contain annual commitments for purchase and delivery of a minimum quantity of product.

      The Company records a provision for estimated sales returns on domestic product sales in the same period as the related revenue is recorded. Sales terms to international distributors and our customers in Germany do not contain a right to return product purchased. The Company may, at its discretion, accept returned product from an international distributor or our direct customers in Germany. The provision for estimated sales returns, if any, is based on an analysis of historical sales returns as adjusted for specifically identified estimated changes in historical return activity.

      The Company may place “no charge” practice introduction Pillar System units with physicians or distributors under a program designed to expand the Company’s customer base. In the United States, the cost of these units is a sales and marketing expense. In international markets during 2005, the Company provided its independent distributors with practice introduction support payments based upon a percentage of each distributor’s cost for the Pillar Systems. These practice introduction support payments were made in the form of a credit against the outstanding accounts receivable balance of the distributor and were recorded as a reduction of sales.

F-9

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

      The following table summarizes the number of customers who individually comprise greater than 10% of total revenue and their aggregate percentage of the Company’s total revenue:

	Revenue
	Number of		Percent of Total
	Customers		Revenue
December 31, 2003		1		16	%
December 31, 2004		—		—
December 31, 2005		1		11	%

      The following table summarizes the geographic dispersion of the Company’s revenue:

	2003		2004		2005
United States	$	368,201	$	936,956	$	3,416,186
Asia Pacific		—		3,330		1,111,031
Europe		—		4,530		152,786
Middle East		—		—		139,371
South Africa		—		—		34,861
	$	368,201	$	944,816	$	4,854,235

     (l) Allowance for Doubtful Accounts

      Credit terms to US customers are agreed prior to shipment with the standard being net 30 days. Credit terms for international distributors vary by contract, and credit terms for our direct customers in Germany are net 30 days. Collateral or any other security to support payment of these receivables generally is not required. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. This allowance is an estimate and is regularly evaluated by the Company for adequacy by taking into consideration factors such as past experience, credit quality of the customer base, age of the receivable balances, both individually and in the aggregate, and current economic conditions that may affect a customer’s ability to pay. Provisions for the allowance for doubtful accounts are recorded in general and administrative expenses. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. A roll forward of the allowance for doubtful accounts is as follows:

	2003		2004
	(Restated)		(Restated)			2005
Beginning balance	$	—	$	6,000		$	11,910
Provision		6,000		14,310			62,209
Write-offs		—		(8,400	)		(14,222	)
Ending balance	$	6,000	$	11,910		$	59,897

     (m) Warranty Costs

      The Company provides its customers with the right to receive a replacement Pillar System until the date of product expiration (which typically is 2 to 3 years from sterilization of the product), in the event a device malfunctions or the physician needs to remove and replace a Pillar implant in a patient for any reason. The Company has based its warranty provision on an analysis of historical warranty claims. Actual results could differ from those estimates. Warranty

F-10

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

reserve provisions and claims for the years ended December 31, 2004 and 2005 were as follows:

	2004
	(Restated)			2005
Beginning balance	$	—		$	366
Warranty provision		1,127			17,445
Warranty claims		(761	)		(12,220	)
Ending balance	$	366		$	5,591

      Actual warranty expense claims in the future could exceed our current warranty expense accruals if there is an increase in our historical experience of (a) defective Pillar System units given that many of the Pillar Systems sold in 2004 and all of the Pillar Systems sold in 2005 are not beyond their two to three year product expiration date, and/or (b) partial extrusions of Pillar inserts. Our commercially reported partial extrusion rate has been less than 1% of all Pillar System units sold.

      The Company maintains product liability insurance in the event of a product recall. The Company is exposed to product liability claims that are inherent in the testing, production, marketing and sale of medical devices. Management believes any losses that may occur from these matters are adequately covered by insurance, and the ultimate outcome of these matters will not have a material effect on the Company’s financial position or results of operations. As of March 6, 2006, the Company has experienced no product liability claims.

     (n) Stock-Based Compensation

      The Company measures compensation costs for options issued under its stock-based compensation plans using the intrinsic-value method of accounting. The Company records deferred compensation expense within stockholders’ deficit for stock options awarded to employees and directors to the extent that the option exercise price is less than the fair market value of common stock on the date of grant. Recorded deferred compensation is amortized to compensation expense over the vesting period of the underlying stock option grants.

      In connection with stock options granted to employees and directors, the Company recorded deferred stock-based compensation costs of $0, $205,668 and $2,498,152 for the years 2003, 2004 and 2005, respectively. Net amortization of deferred stock-based compensation totaled $0, $39,483 and $559,584 for the years ended December 31, 2003, 2004 and 2005, respectively. The deferred compensation is amortized on a straight-line basis over the vesting period of each respective stock option. In 2003 and 2004 the vesting period was 25% on the first anniversary of the date of grant and 25% each year thereafter. The stock option vesting period was modified by the Company’s board of directors in 2005 for all outstanding and future option grants to more closely match the option vesting benefit with the term of service. Under the modified option vesting schedule, each stock option grant has a 4-year vesting schedule, with 25% of the shares underlying each stock option grant vesting on the first anniversary of the date of grant, and the balance of the shares vesting monthly over the 3 years of the vesting period thereafter.

F-11

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

      Adjusted pro forma information regarding net loss is required to be as if the Company had accounted for its employee stock options under the fair value method. All stock options have 10-year terms and vest and become fully exercisable 4 years from the date of grant. The weighted average fair value per share of options granted during 2003, 2004 and 2005 was $0.32, $1.36 and $5.18, respectively. The fair value of these stock options was estimated at the date of grant using the Black-Scholes pricing model (excluding a volatility assumption) with the following assumptions for the years ended December 31:

	2003		2004		2005
Risk-free interest rates		3.0%		3.5%		4.0%
Expected life		5  years		5  years		5  years
Expected volatility		N/A		N/A		N/A
Dividend yield		0.0%		0.0%		0.0%

      As the Company is privately held, it has elected to use the minimum value option method to determine the fair value of employee stock options. The minimum value method does not account for the Company’s stock volatility, which materially increases the fair value of the Company’s stock options. With the adoption on January 1, 2006 of Statement of Financial Accounting Standards (SFAS) No. 123(R) Share-Based Payment, which is a revision of SFAS 123, Accounting for Stock-Based Compensation — Transition and Disclosure, (SFAS 123(R)), the Company will no longer use the minimum value method for valuing future employee stock option grants.

      The following table illustrates the effect on net loss per common share if the fair value method had been applied to the Company’s employee stock options in each period.

			Year Ended December 31
			2003			2004
			(Restated)			(Restated)			2005
Net loss attributable to common stockholders, as reported			$	(9,456,417	)	$	(7,806,033	)	$	(7,021,200	)
Add: Total stock-based employee compensation expense included in the net loss				—			39,483			559,584
Deduct: Total stock-based employee compensation expense determined under fair value-based method for all rewards				(47,041	)		(135,975	)		(1,231,753	)
		Pro forma net loss attributable to common stockholders	$	(9,503,458	)	$	(7,902,525	)	$	(7,693,369	)
Loss per share applicable to common stockholders:
	Basic and diluted, as reported		$	(11.42	)	$	(6.52	)	$	(5.73	)
	Basic and diluted, pro forma		$	(11.48	)	$	(6.61	)	$	(6.28	)

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

F-12

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

     (o) Severance

      The Company accounts for severance costs in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, (SFAS 146). The Company does not have an established severance payment policy for terminated employees. SFAS 146 requires the Company to recognize severance costs over the remaining service period. The Company recorded severance charges of $261,727 and $191,726 for the years ended December 31, 2004 and 2005, respectively. The severance accrual at December 31, 2005 is expected to be paid during 2006. Severance activity is illustrated in the following table:

	2004
	(Restated)			2005
Beginning balance	$	—		$	191,219
Expense		261,727			191,726
Payments		(70,508	)		(209,881	)
Ending balance	$	191,219		$	173,064

     (p) Preferred Stock Warrants Subject to Redemption

      The Company’s Series A, Series B, Series C and Series C-1 preferred stock are subject to conditional redemption at the option of the holder in the event of the liquidation of the Company, which includes the Company’s sale or merger. As a result, in accordance with the provisions of SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (SFAS 150), the Company classifies the preferred stock warrants as liabilities on the balance sheet under the caption “preferred stock warrants subject to redemption”. Warrants to purchase common stock are classified within equity.

     (q) Research and Development Costs

      Research and development costs are charged to expense as incurred.

     (r) Advertising Expense

      Advertising costs are expensed as incurred and totaled $6,574, $9,690 and $100,339 for the years ended December 31, 2003, 2004 and 2005, respectively.

     (s) Foreign Currency Transactions

      The Company incurs some of its clinical study expenditures in foreign currencies. Foreign currency transaction gains and losses are included in other, net in the accompanying statement of operations.

     (t) 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. A valuation allowance for deferred income tax assets is recorded when it is

F-13

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

more likely than not that some portion or all of the deferred income tax assets will not be realized.

     (u) Net Loss per Share

      Basic net loss per common share (Basic EPS) is computed by dividing net loss by the weighted-average number of common shares outstanding. Diluted net loss per common share (Diluted EPS) is computed by dividing net loss by the weighted-average number of common shares and dilutive potential common shares outstanding. Potential common shares consist of shares issuable upon the exercise of stock options and warrants. Diluted EPS is identical to Basic EPS since potential common shares are excluded from the calculation, as their effect is anti-dilutive. The weighted average shares outstanding for basic and diluted loss per share includes 378,122 shares of common stock underlying warrants to purchase common stock as such warrants are immediately exercisable and have an exercise price of $0.02 per share. The common stock underlying the warrants is considered outstanding in substance for EPS purposes. Historical outstanding potential common shares not included in diluted net loss per share at year end attributable to common stockholders’ calculations were 3,448,856, 8,922,304 and 9,487,031 for the years ended December 31, 2003, 2004 and 2005, respectively.

     (v) Recently Issued Accounting Statements

      In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R), Share Based Payment (SFAS 123(R)). Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS No. 123, Accounting for Stock Based Compensation. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair value. Pro forma disclosure is no longer an alternative. SFAS 123(R) must be adopted no later than annual periods beginning after December 15, 2005. The Company will adopt SFAS 123(R) on January 1, 2006 using the modified prospective method. Under the modified prospective method, compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date.

      The adoption of SFAS 123(R) will have a significant impact on the Company’s results of operations, although it will have no impact on the Company’s overall financial position. The impact of adopting SFAS 123(R) on future period earnings cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, it is expected to have a material negative impact on future earnings. In addition, the impact of the adoption of SFAS 123(R) cannot be estimated based on the pro forma disclosures described in note 1(n) as the Company applied the minimum value method to historical periods, which is not allowed under SFAS 123(R).

      In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS 150), to address how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The Company adopted SFAS 150 as of July 1, 2003. The provisions of SFAS 150 resulted in the classification of the Company’s preferred stock warrants as liabilities. Upon adoption of SFAS 150, the Company recognized a benefit of $266,989, as a cumulative effect of a change in accounting principle to record the preferred stock warrants at their estimated fair value.

F-14

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

Future changes in the fair value of the preferred stock warrants will result in charges or benefits to the Company’s results of operations and will be included as a component of other income (expense).

      In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4, (SFAS 151). SFAS 151 amends the guidance in Accounting Research Board (ARB) 43, Chapter 4, Inventory Pricing, (ARB 43), to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and spoilage. SFAS 151 requires those items be recognized as current period charges regardless of whether they meet the criterion of so abnormal which was the criterion specified in ARB 43. In addition, SFAS 151 requires that allocation of fixed production overhead to the cost of production be based on normal capacity of the production facilities. The Company adopted SFAS 151 effective January 1, 2004. The adoption of SFAS 151 did not have a significant effect on the Company’s financial statements.

      In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections — A Replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS 154). SFAS 154 replaces Accounting Principles Board (APB) Opinion 20, Accounting Changes, (APB 20) and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. APB 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. SFAS 154 requires retrospective application to prior periods’ financial statements for voluntary changes in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The impact of SFAS 154 will depend on the accounting change, if any, in a future period.

(2) Restatement of Financial Statements

      The Company has restated its financial statements for the years 2003 and 2004. In addition, certain disclosures in the notes to the financial statements contained in this report have been restated to reflect the restatement adjustments. The determination to restate these financial statements was made after errors were discovered in January 2006. Such adjustments:

(a)  accounted for an embedded derivative under SFAS No. 133, Accounting for Derivative Investments and Hedging Activities, (SFAS 133);

(b)  corrected the accounting for preferred stock warrants subject to mandatory redemption under SFAS 150;

(c)  corrected the accounting for stock-based compensation;

(d)  corrected the accounting of severance amounts due to former employees;

(e)  corrected other accounting errors related to the accrual of costs and expenses;

(f)  corrected the classification of investments that were previously recorded as cash;

(g)  corrected the accounting for recognition of a beneficial conversion feature;

(h)  corrected other miscellaneous items identified by the Company during its current evaluation of its accounting policies, none of which was significant individually or in the aggregate; and

F-15

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

(i)  corrected the 2003 beginning balances of Statement of Stockholders’ Deficit.

      The restatement narrative below includes only the 2003 and 2004 audited amounts as well as the impact of prior period restatement amounts on the beginning accumulated deficit at January 1, 2003. The letters above correspond to the restatement adjustments in the accompanying tables.

      The significant restatement adjustments are outlined below.

     (a)  Embedded Derivative

      In January 2006, while reviewing all debt and equity related transactions, the Company discovered that the 8.0% Bridge Loan Agreement (2003 Bridge Notes) it entered into in 2003 contained a provision that required a portion of the 2003 Bridge Notes to be recorded as an embedded derivative. Embedded within the 2003 Bridge Notes was a requirement that in the event the Company was liquidated, including a sale or merger, prior to the conversion of the notes to equity, the note holders would receive a liquidation preference of 3 times the original principal amount invested. In effect, the liquidation preference is considered to be a contingently exercisable put option that is not clearly and closely related to the debt host instrument. The Company has determined that the liquidation preference (“put”) in the 2003 Bridge Note is an embedded derivative, which under SFAS 133 is required to be bifurcated and accounted for as a freestanding derivative at fair value. Therefore, the Company allocated the estimated fair value of $1,509,200 of the total proceeds received upon the issuance of the 2003 Bridge Notes to this put feature and has classified it as a liability on the balance sheet. The residual amount of the proceeds was allocated to the 2003 Bridge Notes. The resulting discount on the 2003 Bridges Notes was accreted over the life of the notes, which resulted in a restatement of interest expense in 2003. At December 31, 2003, the put feature was marked to estimated fair value based on an independent valuation commissioned by the Company, resulting in a gain of $638,508. Upon the conversion of the 2003 Bridge Notes into the Series C-1 preferred stock in March 2004, the put feature was no longer outstanding and the remaining fair value of the put feature was recorded as a gain of $870,692. The impact of correcting the embedded derivative accounting on the statement of operations was an increase in interest expense of $1,509,200 in 2003, and derivative gains on the put of $638,508 and $870,692, for the years ended December 31, 2003 and 2004, respectively.

     (b)  Preferred Stock Warrants Subject to Mandatory Redemption

      The Company determined that in 2003 it had incorrectly determined the fair value of the preferred stock warrants, which were classified as liabilities upon the adoption of SFAS 150. The correction of this error resulted in the recording of a cumulative effect benefit of a change in accounting principle of $266,989 in the statement of operations for the year ended December 31, 2003. The Company had not previously recorded a cumulative effect adjustment upon the adoption of SFAS 150. In addition, the previously recorded interest expense in 2004 of $436,716 related to the change in fair value of the preferred stock warrants was reversed and the Company recorded an adjustment to preferred stock warrant gain of $9,278 in 2003 and $128,465 in 2004. Preferred stock warrants issued in connection with debt in 2002 and 2003 changed the value of the debt discount related to these offerings. The change in debt discount reduced interest expense by $74,632 in 2003. In 2004, the amortization of debt discount increased interest expense by $185,921.

F-16

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

     (c)  Stock-Based Compensation

      The retrospective valuation of the Company’s various equity instruments in February 2006 revealed that certain employee stock options issued in 2004 had been granted at less than fair market value. The Company recorded $205,668 of deferred stock-based compensation for all grants during 2004 of which $39,483 of employee stock-based compensation expense was recorded for the year ended December 31, 2004.

     (d)  Severance Accounting

      As a result of a correction of the Company’s accounting for severance costs to be in compliance with the principles contained in SFAS 146, the Company increased its accrual and related severance expense by $191,219 for the year ended December 31, 2004. Prior to this correction, severance costs were expensed as they were paid.

     (e)  Accrual of Cost and Expenses

      As part of the restatement, the Company analyzed all accrued expenses and recorded a reduction in expense of $5,553 for the year ended December 31, 2003. Expenses of $37,067 were recorded for the year ended December 31, 2004. The increased expense in 2004 related to $54,606 of clinical study expenses, offset by $17,539 of other accrual differences. In 2004, clinical study expenses were recorded based on date of invoice receipt rather than when the services were rendered.

     (f)  Cash and Investments

      As of December 31, 2004, the Company reclassified $3,674,007 of investments previously recorded as a cash equivalent to short-term investments as the original maturity date of these investments exceeded 90 days. In addition, $2,854 was reclassified from cash to prepaid expenses.

     (g)  Beneficial Conversion Feature

      The Company corrected an error to record the beneficial conversion feature of $296,747 in 2003 resulting from the change in the Series A and Series B preferred stock conversion price from $1.00 and $3.00, respectively, to $0.898 and $2.6571. The adjustment to the conversion feature resulted from weighted average anti-dilution protection. The conversion price adjustment was initially to be amortized from the date of the adjustment until June 2006, the date the Series A and Series B preferred stockholders had a non-mandatory redemption right. In the first quarter of 2004, in connection with the Series C and C-1 preferred stock financings, Series A and B preferred stock were amended to remove the redemption right. At that time the remaining beneficial conversion feature was amortized. For the years ended December 31, 2003 and 2004, the amortization of the preferred stock beneficial conversion feature was $44,941 and $251,806, respectively.

     (h)  Other Miscellaneous Items

      The Company identified and corrected other miscellaneous items during its current evaluation of its accounting policies. In addition, other known corrections that were previously not recorded by the Company, as their effects were not material individually or in the aggregate, were recorded. Included in the adjustments are the following reclassifications: $100,709 of warehouse and distribution costs in 2004 reclassified from sales and marketing to cost of

F-17

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

goods sold; patent expenses of $107,993 and $136,105 in 2003 and 2004, respectively, reclassified from general and administrative to research and development; $78,750 in 2004 reclassified from general and administrative to sales and marketing for recruiting-related expenses; and $25,976 of government grant proceeds reclassified to research and development from other, net in 2003. In addition, in 2004, $85,849 of related party receivables was reclassified from long-term to short-term.

     (i)  Effect on Beginning Stockholder’s Deficit

      The restatement adjustments decreased the Company’s beginning accumulated deficit as of December 31, 2002 (presented in the statements of stockholder’s deficit) from $13,302,375 as previously reported to $14,147,601 as restated. The $1,020,560 reduction in stockholders’ deficit from ($13,119,512) to ($14,140,072) related to the recording of a deemed dividend to Series B preferred stock for $951,208. The offset to this increase in Series B preferred stock was a $175,334 and $775,874 reduction in additional paid-in capital and accumulated deficit, respectively. The remaining reduction in stockholders’ deficit of $69,352 consists of $3,631 of interest expense recognized from amortizing the debt discount on convertible securities, and $87,639 for errors related to various accruals and expenses offset by a $21,918 increase due to corrections for the valuation of common stock warrants.

F-18

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

      The following table presents the effect of the restatement on the balance sheet:

			December 31, 2004
			As Previously						Adjustment
			Reported			Adjustments			Description		As Restated
Assets
Current assets:
	Cash and cash equivalents		$	5,935,131		$	(3,676,861	)		(f)	$	2,258,270
	Short-term investments			2,500,000			3,674,007			(f)		6,174,007
	Trade receivables, less allowances for doubtful accounts of $11,910			274,008			—					274,008
	Related-party receivables			55			73,725			(e)(h)		73,780
	Inventories			415,563			—					415,563
	Prepaid expenses			—			96,474			(f)(h)		96,474
	Other current assets			98,220			(93,621	)		(h)		4,599
		Total current assets		9,222,977			73,724					9,296,701
Related-party and other receivables				85,849			(85,849	)		(h)		—
Machinery and equipment, net				343,266			18,671			(h)		361,937
		Total assets	$	9,652,092		$	6,546				$	9,658,638
Liabilities, Convertible Participating Preferred Stock and Stockholders’ Deficit
Current liabilities:
	Accounts payable		$	106,108		$	—				$	106,108
	Accrued expenses			550,781			(79,872	)		(e)(h)		470,909
	Accrued payroll and related expenses			—			397,144			(d)(e)		397,144
		Total current liabilities		656,889			317,272					974,161
Preferred stock warrants subject to redemption				436,716			(342,432	)		(b)		94,284
		Total liabilities		1,093,605			(25,160	)				1,068,445
Convertible participating preferred stock:
	Series A, $0.01 par value. Authorized 775,000 shares; issued and outstanding 750,000 shares			777,743			(30,363	)		(g)		747,380
	Series B, $0.01 par value. Authorized 4,500,000 shares; issued and outstanding 4,185,411 shares			12,759,358			748,103			(g)(i)		13,507,461
	Series C, $0.01 par value. Authorized 9,500,000 shares; issued and outstanding 7,615,675 shares			18,723,137			—					18,723,137
	Series C-1, $0.01 par value. Authorized 2,940,000 shares; issued and outstanding 2,498,833 shares			6,230,879			—					6,230,879
		Total convertible participating preferred stock		38,491,117			717,740					39,208,857
Common stockholders’ deficit:
	Undesignated stock, $0.01 par value. Authorized 2,000,000 shares, none outstanding			—			—					—
	Common stock $0.01 par value. Authorized 21,500,000 shares; issued and outstanding 821,712 shares			8,217			—					8,217
	Additional paid-in capital			787,276			(134,668	)		(c)(g)(i)		652,608
	Deferred stock based compensation			—			(166,185	)		(c)		(166,185	)
	Accumulated deficit			(30,728,123	)		(385,181	)		(i)		(31,113,304	)
		Total common stockholders’ deficit		(29,932,630	)		(686,034	)				(30,618,664	)
		Total liabilities, convertible participating preferred stock and stockholders’ deficit	$	9,652,092		$	6,546				$	9,658,638

F-19

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

      The following table presents the effect of the restatement on the statement of operations:

			December 31, 2003
			As Previously						Adjustment
			Reported			Adjustments			Description		As Restated
Net sales			$	368,201		$	—				$	368,201
Cost of sales				412,316			—					412,316
		Gross margin		(44,115	)		—					(44,115	)
Operating expenses:
	Research and development			3,224,338			76,566			(e)(h)		3,300,904
	General and administrative			2,120,669			(117,713	)		(e)(h)		2,002,956
	Sales and marketing			2,327,608			5,108			(e)		2,332,716
		Total operating expenses		7,672,615			(36,039	)				7,636,576
		Loss from operations		(7,716,730	)		36,039					(7,680,691	)
Other income (expense):
	Interest income			32,147			—					32,147
	Interest expense			(1,225,167	)		(1,434,568	)		(a)(b)		(2,659,735	)
	Put option gain			—			638,508			(a)		638,508
	Preferred stock warrant gain			—			9,278			(b)		9,278
	Other, net			12,515			(30,487	)		(e)(h)		(17,972	)
		Total other income (expense)		(1,180,505	)		(817,269	)				(1,997,774	)
		Loss before cumulative effect of change in accounting principle		(8,897,235	)		(781,230	)				(9,678,465	)
Cumulative effect of change in accounting principle				—			266,989			(b)		266,989
		Net loss		(8,897,235	)		(514,241	)				(9,411,476	)
Amortization of beneficial conversion feature of Series A and B preferred stock				—			(44,941	)		(g)		(44,941	)
		Net loss attributable to common stockholders	$	(8,897,235	)	$	(559,182	)			$	(9,456,417	)
Basic and diluted net loss per common share before cumulative effect of change in accounting principle			$	(10.75	)	$	(0.99	)			$	(11.74	)
Cumulative effect of change in accounting principle				—			0.32					0.32
Basic and diluted net loss per common share			$	(10.75	)	$	(0.67	)			$	(11.42	)
Basic and diluted weighted average common shares outstanding				827,819			827,819					827,819

F-20

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

      The following table presents the effect of the restatement on the statement of operations:

			December 31, 2004
			As Previously						Adjustment
			Reported			Adjustments			Description		As Restated
Net sales			$	944,816		$	—				$	944,816
Cost of sales				687,818			102,987			(e)(h)		790,805
		Gross margin		256,998			(102,987	)				154,011
Operating expenses:
	Research and development			2,093,510			188,370			(c)(e)(h)		2,281,880
	General and administrative			2,218,856			(70,580	)		(c)(d)(e)(h)		2,148,276
	Sales and marketing			3,947,074			92,373			(c)(e)(h)		4,039,447
		Total operating expenses		8,259,440			210,163					8,469,603
		Loss from operations		(8,002,442	)		(313,150	)				(8,315,592	)
Other income (expense):
	Interest income			169,072			—					169,072
	Interest expense			(676,915	)		250,795			(b)		(426,120	)
	Put option gain			—			870,692			(a)		870,692
	Preferred stock warrant gain			—			128,465			(b)		128,465
	Other, net			(25,761	)		45,017			(h)		19,256
		Total other income (expense)		(533,601	)		1,294,969					761,365
		Net loss		(8,536,046	)		981,819				$	(7,554,227	)
Amortization of beneficial conversion feature of Series A and B preferred stock				—			(251,806	)		(g)		(251,806	)
		Net loss attributable to common stockholders	$	(8,536,046	)	$	730,013				$	(7,806,033	)
Basic and diluted net loss per common share			$	(7.13	)	$	0.61				$	(6.52	)
Basic and diluted weighted average common shares outstanding				1,196,366			1,196,366					1,196,366

F-21

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

      The following table presents the effect of the restatement on the statement of cash flows:

				Year Ended December 31, 2003
				As Previously						Adjustment
				Reported			Adjustments			Description		As Restated
Cash flows from operating activities:
	Net loss			$	(8,897,235	)	$	(514,241	)			$	(9,411,476	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation			83,395			—					83,395
		Put option gain			—			(638,508	)		(a)		(638,508	)
		Preferred stock warrant gain			—			(9,278	)		(b)		(9,278	)
		Bad debt expense			—			6,000			(h)		6,000
		Non-cash interest expense			427,385			2,103,266			(a)(b)		2,530,651
		Cumulative effect of change in accounting principle			—			(266,989	)		(b)		(266,989	)
	Change in operating assets and liabilities:
		Trade receivables			(127,547	)		(6,000	)		(h)		(133,547	)
		Related-party receivables			10,308			—					10,308
		Inventories			(171,634	)		—					(171,634	)
		Prepaid expenses			—			59,562			(e)(h)		59,562
		Other current assets			279,379			(279,379	)		(e)		—
		Accounts payable			137,978			41,861			(e)		179,839
		Accrued expenses			895,860			(756,528	)		(d)(e)		139,332
		Accrued payroll and related expenses			—			94,191			(d)		94,191
			Net cash used in operating activities		(7,362,111	)		(166,043	)				(7,528,154	)
Cash flows from investing activities:
	Purchases of machinery and equipment				(197,916	)		—					(197,916	)
	Sales of machinery and equipment				13,463			—					13,463
		Net cash used in investing activities			(184,453	)		—					(184,453	)
Cash flows from financing activities:
	Proceeds from issuance of long-term debt				1,000,000			—					1,000,000
	Increase in deferred offering costs				(169,235	)		169,235			(h)		—
	Proceeds from stock options exercised				67,958			—					67,958
	Proceeds from convertible notes payable				5,356,766			17,696			(g)		5,374,462
	Refund of odd shares				(17	)		17			(h)		—
	Repayments on long-term debt				(38,085	)		(20,905	)		(g)		(58,990	)
		Net cash provided by financing activities			6,217,387			166,043					6,383,430
		Net decrease in cash and cash equivalents			(1,329,177	)		—					(1,329,177	)
Cash and cash equivalents:
	Beginning of year				2,181,759			—					2,181,759
	End of year			$	852,582		$	—				$	852,582
Supplemental disclosure:
	Interest paid			$	138,049		$	(8,965	)		(h)	$	129,084
Noncash investing and financing activities:
	Value of common stock warrants issued with debt				142,300			86,835			(b)		229,135
	Value of common stock warrants issued for debt modification				—			144,948			(b)		144,948
	Value of preferred stock warrants issued for debt guarantee				294,093			(138,786	)		(b)		155,307

F-22

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

     The following table presents the effect of the restatement on the statement of cash flows:

				Year Ended December 31, 2004
				As Previously						Adjustment
				Reported			Adjustments			Description		As Restated
Cash flows from operating activities:
	Net loss			$	(8,536,046	)	$	981,819				$	(7,554,227	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization			111,204			1					111,205
		Stock-based compensation			153			39,330			(c)		39,483
		Put option gain			—			(870,692	)		(a)		(870,692	)
		Preferred stock warrant gain			—			(128,465	)		(b)		(128,465	)
		Allowance for doubtful accounts			—			14,310			(h)		14,310
		Non-cash interest expense			706,506			(368,780	)		(b)		337,726
	Change in operating assets and liabilities:
		Trade receivables			(146,461	)		(14,310	)		(h)		(160,771	)
		Related-party receivables			78,799			(22,150	)		(e)(h)		56,649
		Inventories			(128,063	)		—					(128,063	)
		Prepaid expenses			—			(3,435	)		(f)(h)		(3,435	)
		Other current assets			(6,577	)		1,978			(h)		(4,599	)
		Accounts payable			(69,440	)		(41,861	)		(e)(h)		(111,301	)
		Accrued expenses			(166,616	)		(27,082	)		(e)(h)		(193,698	)
		Accrued payroll and related expenses			—			267,262			(d)(h)		267,262
			Net cash used in operating activities		(8,156,541	)		(172,075	)				(8,328,616	)
Cash flows from investing activities:
	Purchase of short-term investments				(2,500,000	)		(3,674,007	)		(f)		(6,174,007	)
	Purchases of machinery and equipment				(159,895	)		—					(159,895	)
		Net cash used in investing activities			(2,659,895	)		(3,674,007	)				(6,333,902	)
Cash flows from financing activities:
	Proceeds from stock options exercised				4,895			692			(h)		5,587
	Proceeds from sale of Series C and C-1 preferred stock net of financing costs and note conversion				18,407,057			169,926			(h)		18,576,983
	Repayments on long-term debt				(2,512,967	)		(1,397	)		(h)		(2,514,364	)
		Net cash provided by financing activities			15,898,985			169,221					16,068,206
		Net increase in cash and cash equivalents			5,082,549			(3,676,861	)		(f)		1,405,688
Cash and cash equivalents:
	Beginning of year				852,582			—					852,582
	End of year			$	5,935,131		$	(3,676,861	)			$	2,258,270
Supplemental disclosure:
	Interest paid			$	272,124		$	(183,730	)		(b)(h)	$	88,394
Noncash investing and financing activities:
	Conversion of notes payable to Series C-1 preferred stock				6,049,462			(169,926	)		(h)		5,879,536
	Conversion of interest payable to Series C-1 preferred stock				497,497			—					497,497

F-23

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

(3) Liquidity and Capital Resources

      The Company incurred net losses of $9,411,476, $7,554,227 and $7,021,200 and negative cash flows from operating activities of $7,528,154, $8,328,616 and $6,553,748 for the years ended December 31, 2003, 2004 and 2005, respectively. The Company has primarily financed operations since inception through proceeds from issuance of convertible participating preferred stock, proceeds from convertible short-term notes payable, long-term debt and, to a lesser extent, sales of its Pillar Systems.

      In March 2005, the Company obtained a $5.0 million loan facility for general corporate purposes from Lighthouse Capital Partners (Lighthouse). On December 30, 2005, the Company drew $2.0 million of the loan facility as required by the Lighthouse loan agreement. On February 28, 2006, the Company drew $1.0 million against the Lighthouse loan facility. On March 3, 2006, the agreement was amended to increase the commitment amount from $5.0 million to $8.0 million. Provisions of the Lighthouse loan agreement are described in note 6.

      As of December 31, 2005, the Company had total cash and cash equivalents of $3,396,577 and short-term investments of $247,734. Based upon the anticipated working capital requirements, the Company will be required to raise capital to maintain operations at current and anticipated levels through 2006. During the first quarter of 2006, the Company will initiate efforts to raise up to $50 million to finance current operations and provide for general corporate purposes, including expanding domestic and international marketing and sales organizations and programs, increasing product development efforts and increasing the Company’s clinical study initiatives. The Company’s future capital requirements will depend upon a number of factors, including, but not limited to the amount of cash generated by operations, competitive and technological developments and the rate of growth of the business. Although the Company has been successful in raising funds in the past, there is no assurance that any such financings or borrowings can be obtained in the future on terms acceptable to the Company. The Company believes cash, cash equivalents, investments and cash provided by operating activities, together with the Lighthouse loan facility, will be sufficient to fund working capital and capital resource needs through at least 2006, if reductions are made to its expansion plans for sales and marketing programs and limitations are made to product development and clinical study initiatives.

(4) Machinery and Equipment

      Machinery and equipment consists of the following as of December 31, 2004 and 2005:

	2004						Estimated
	(Restated)			2005			Useful Lives
Furniture and office equipment	$	54,256		$	79,156			5 Years
Computer hardware and software		209,115			302,481			3 Years
Production and production support equipment		325,722			415,379			5 Years
Leasehold improvements		12,956			21,256			4 Years
		602,049			818,272
Less accumulated depreciation and amortization		(240,112	)		(392,363	)
	$	361,937		$	425,909

F-24

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

      Depreciation expense was $83,395, $111,205 and $169,256 for the years ended December 31, 2003, 2004 and 2005, respectively. At December 31, 2005, the cost and accumulated amortization of assets under capital leases was $24,899 and $1,459, respectively.

(5) Accrued Expenses

      Accrued expenses consist of the following as of December 31, 2004 and 2005:

	2004
	(Restated)		2005
Clinical trials	$	244,351	$	186,325
Other		226,558		459,126
	$	470,909	$	645,451

(6) Long-term Debt

      Long-term debt consists of the following as of December 31, 2004 and 2005:

		2004		2005
Loan dated December 30, 2005 (interest at prime plus 3% maturing December 2008), net of $67,052 debt discount in 2005		$	—	$	1,932,948
Capital lease for marketing equipment entered into October 1, 2005 (interest at 9.35% maturing September 2009)			—		23,599
			—		1,956,547
Less current portion, net of $22,351 debt discount in 2005			—		(337,536	)
	Total long-term debt	$	—	$	1,619,011

      Future long-term debt payments as of December 31, 2005 are:

2006	$	359,887
2007		774,174
2008		884,134
2009		5,404
	$	2,023,599

      In March 2005, the Company entered into a term debt facility with Lighthouse with maximum principal drawdown of $5.0 million. The Company drew down $2.0 million during December 2005. On February 28, 2006, the Company drew $1.0 million against the Lighthouse loan facility. On March 3, 2006, the agreement was amended to increase the commitment amount from $5.0 million to $8.0 million. As of March 3, 2006, the unfunded portion of the loan facility was $5.0 million, of which the Company may draw $2.0 million on or before March 31, 2006 and an additional $3.0 million on or before June 30, 2006.

      Borrowings under the agreement bear interest at the lender’s prime rate plus 3.0%, with monthly interest-only payments from the time of funding until June 30, 2006. Beginning on July 1, 2006, each draw will be amortized over 30 consecutive monthly payments of principal and interest, with an additional final payment in an amount equal to 5% of the original loan

F-25

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

principal due by December 31, 2008. The 5% final payment will be recognized ratably as interest expense from the date of the draw down over the remaining term of the loan. Lighthouse has a perfected first position lien on all of the Company’s assets, including intellectual property. The security interest in the intellectual property will be released if the Company raises a minimum of $20.0 million of additional equity in an initial public offering, or a minimum of $10.0 million of preferred equity in a subsequent round of private financing.

      An initial warrant to purchase 95,420 shares of Series C-1 preferred stock was issued on March 23, 2005, which represented 5.0% of the $5.0 million loan facility divided by the exercise price of $2.62 per share. For each draw down by the Company, Lighthouse will receive warrants to purchase the number of shares of Series C-1 preferred stock equal to 4.0% of the amount of each draw up to $5.0 million, divided by the warrant exercise price of $2.62 per share. These warrants will be physically delivered on June 30, 2006. As additional consideration for the expanded loan commitment in March 2006, Lighthouse received 103,053 Series C-1 preferred stock warrants. Including the March 2006 amendment, an aggregate of 179,384 Series C-1 preferred stock warrants may be issued to Lighthouse subsequent to December 31, 2005. As of December 31, 2005, the Company was in compliance with all of the covenants in the credit agreement, which include maintaining all collateral in good condition, providing monthly financial results and keeping Lighthouse informed of Company events.

      As further discussed in note 11, the Series C-1 preferred stock warrants are classified as liabilities under preferred stock warrants subject to redemption. The Series C-1 warrants issued in March 2005 resulted in non-cash debt issuance costs of $101,645, which is being amortized over the term of the debt on a straight-line basis. The $2.0 million funding on December 30, 2005 resulted in a $67,175 discount on the Lighthouse loan related to the warrants to be delivered on June 30, 2006, which will be recognized using the effective-interest method.

(7) Income Taxes

      The Company has incurred net operating losses since inception. The Company has not reflected any benefit of such net operating loss carry forwards in the accompanying financial statements.

      The income tax expense benefit differed from the amount computed by applying the U.S. federal income tax rate of 34% to income before income taxes from continuing operations excluding stock-based compensation items which are allocated to equity as a result of the following:

	2003			2004
	(Restated)			(Restated)			2005
Computed “expected” tax benefit		(34.0	)%		(34.0	)%		(34.0	)%
State income tax		(1.7	)		(1.8	)		(1.7	)
Non-deductible expenses		4.4			1.6			3.1
Research and development credit		(0.9	)		(1.2	)		(0.8	)
Change in tax rate apportionment		3.0			—			—
Other		—			—			0.1
Change in valuation allowance		29.2			35.4			33.3
		—	%		—	%		—	%

F-26

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

      The tax effect of temporary differences that give rise to significant portions of the deferred tax assets as of December 31 is presented below:

			2003			2004			2005
Deferred tax assets (liabilities):
	Reserves and accruals		$	26,688		$	42,616		$	94,997
	Machinery and equipment			20,278			1,549			(5,669	)
	Net operating loss carryforwards			6,108,798			9,520,945			12,131,216
	Start-up costs			1,944,172			1,419,859			895,545
	Bifurcated derivative			312,413			—			—
	Deferred stock compensation			—			14,166			214,951
	Research carry forward credit			80,634			168,496			223,224
		Total gross deferred tax assets		8,492,983			11,167,631			13,554,263
Valuation allowance				(8,492,983	)		(11,167,631	)		(13,554,263	)
		Net deferred tax assets	$	—		$	—		$	—

      The valuation allowance for deferred tax assets as of December 31, 2003, 2004, and 2005 was $8,492,983, $11,167,631 and $13,554,263, respectively. The net change in the total valuation allowance for the years ended December 31, 2004 and 2005 was an increase of $2,674,648 and $2,386,632, respectively.

      In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible.

      Based on the level of historical taxable income and projections of future taxable income over the periods in which the deferred tax assets are deductible, management believes that it is more likely than not that the Company will not realize the benefits of these deductible differences. Accordingly, the Company has provided a valuation allowance against the net deferred tax assets as of December 31, 2004 and 2005.

      As of December 31, 2005, the Company has federal and state net operating loss and research and development credit carry forwards of approximately $31.9 million and $220,000 respectively. The net operating loss and tax credit carry forwards, if unutilized, will expire in the years 2019 through 2022. The Company has a valuation allowance from net operating loss carryforwards of $49,725 which when utilized the benefit will be recorded to additional paid-in capital instead of the statement of operations.

      Federal tax laws impose significant restrictions on the utilization of net operating loss carry forwards in the event of a change in ownership of the Company, as defined by the Internal Revenue Code Section 382. The Company’s net operating loss carry forwards may be subject to the above limitations.

(8) Common Stockholder Equity

      The Company has 821,712 shares and 855,676 shares, respectively, of common stock outstanding at December 31, 2004 and 2005.

F-27

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

      The holders of the Company’s common stock are generally entitled to one vote for each share held on all matters submitted to a vote of the stockholders and do not have any cumulative voting rights. Holders of the Company’s common stock are entitled to receive proportionally any dividends declared by the Company’s board of directors, subject to any preferential dividend rights of outstanding preferred stock.

      In the event of the Company’s liquidation or dissolution, holders of the Company’s common stock are entitled to share ratably in all assets remaining after payment of all debts and other liabilities, subject to the prior rights of any outstanding preferred stock. Holders of the Company’s common stock have no preemptive, subscription, redemption or conversion rights.

(9) Participating Convertible Preferred Stock

      The Company has 750,000, 4,185,411, 7,615,675 and 2,498,833 shares, respectively, of Series A, Series B, Series C and Series C-1 participating convertible preferred stock outstanding at December 31, 2004 and 2005.

      The Company sold the Series C preferred stock in the first quarter of 2004 with proceeds of $18,723,137, net of financing expenses. The Series C-1 preferred stock also was issued in the first quarter of 2004 upon the conversion of outstanding debt and accrued interest, collectively aggregating $6,230,879, net of financing expenses. As of December 31, 2005, the terms of the various classes of the Company’s preferred stock are as follows:

Redemption Rights

      No class of preferred stock has redemption rights.

Liquidation Preferences

      Series C has senior liquidation rights of $5.24 per share prior to Series C-1’s liquidation preference of $5.24 per share, and prior to the combined Series A and Series B pari passu liquidation preference of $1.00 and $3.00 per share, respectively. After all of the above liquidation preferences have been paid, any remaining liquidation proceeds are paid to common stockholders and all classes of preferred stock on an as-if converted basis. However, Series A, B, C and C-1 preferred stockholders are limited to aggregate liquidation proceeds of $3.00, $9.00, $7.86 and $7.86, respectively, per share, with the remaining proceeds paid to common stockholders.

      A liquidation of the Company includes the sale, transfer, exclusive licensing or other disposition of all or substantially all of the Company’s assets or intellectual property; the merger or consolidation of the Company with another entity gaining more than 50% ownership; or a liquidation, dissolution or winding down of the Company. As the preferred stockholders have the majority of the voting rights and seats on the board of directors, the liquidation of the Company is outside of the control of the Company. Therefore, the Company has classified its issued and outstanding preferred stock outside of permanent equity for accounting purposes.

Dividends

      Series C and C-1 preferred stockholders are entitled to a non-cumulative dividend of $0.21 per annum (8%) prior to the payment of dividends on Series A and B preferred stock and common stock. After the payment of the Series C and C-1 preferred stock dividend and prior to the payment of dividends to common stockholders, Series A and B preferred stock are entitled to a non-cumulative dividend of $0.08 and $0.24 per annum (8% for each class),

F-28

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

respectively. After all preferred stock dividend preferences have been paid, the common stockholders participate with preferred stockholders on an as-if converted basis.

Anti-dilution Rights

      If the Company issues equity or convertible instruments that are not subject to defined carve out provisions below the then applicable conversion price for each preferred stock series, the conversion price to common stock will be adjusted on a weighted average basis.

Conversion Rights

      All classes of the Company’s preferred stock are convertible into common stock at the option of the holder. As noted above, the conversion price of all outstanding preferred stock issuances is subject to weighted average antidilution protection. During 2003, the conversion price of Series A and Series B preferred stock was adjusted from $1.00 and $3.00 per share to $0.898 and $2.6571, respectively, as a result of the anti-dilution provision. This adjustment resulted in a beneficial conversion feature of $296,747 that was initially amortized from the date of the adjustments until June 2006, the date the Series A and B preferred stockholders had a non-mandatory redemption right. In the first quarter of 2004 in connection with the Series C and C-1 financings, the Series A and B preferred stock were amended to remove the redemption right. At that time, the remaining unamortized beneficial conversion feature was amortized. For the years ended December 31, 2003 and 2004, the amortization of the preferred stock beneficial conversion feature was $44,941 and $251,806, respectively. At December 31, 2005, Series A, Series B, Series C and Series C-1 preferred stock were convertible into 417,594, 2,362,770, 3,807,837 and 1,249,416 shares of common stock, respectively. At December 31, 2005, the conversion price of Series A, Series B, Series C and Series C-1 preferred stock was $0.898, $2.6571, $2.62 and $2.62, respectively.

      Under the Company’s current certificate of incorporation, all classes of preferred stock are automatically convertible into common stock upon a qualified initial public offering at a price of not less than $7.86 per share (as adjusted for any stock splits, stock dividends, combinations, subdivisions, recapitalizations or the like), resulting in gross proceeds to the Company of at least $20 million (after deducting underwriters expenses and commissions). See footnote 17 to these financial statements for a description of how these automatic conversion terms for the preferred stock may change in the future.

Voting Rights

      Preferred stockholders have the same voting rights as common stockholders. Preferred stockholders have one vote for each share of common stock into which such holder’s shares of preferred stock are convertible, as determined by the then current conversion price. As a result of the preferred stockholders’ board of directors’ representation and voting rights, they effectively control the affairs of the Company, including its liquidation.

Investor Rights Agreement

      The Company granted registration rights to the holders of its preferred stock and to certain holders of warrants to purchase its preferred stock, pursuant to the terms of the Investors’ Rights Agreement dated January 28, 2004 (Investors’ Rights Agreement). The registration rights described in the Investors’ Rights Agreement are subject to customary restrictions such as minimums, blackout periods and, if a registration is underwritten, any limitations on the number of shares to be included in the underwritten offering imposed by the managing

F-29

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

underwriter. The Investors Rights Agreement also contains customary indemnification and contribution provisions.

      Pursuant to the Investors’ Rights Agreement, holders of the Company’s preferred stock have the right of first offer in future sales by the Company of any of its stock, except for (a) the issuance or sale of shares of common stock or options to employees, directors, consultants and other service providers for the primary purpose of soliciting or retaining their services pursuant to plans or agreements approved by the Company’s board of directors; (b) the issuance of securities pursuant to a bona fide, firmly underwritten public offering of shares of registered common stock, (c) the issuance of securities pursuant to the conversion or exercise of convertible or exercisable securities, (d) the issuance of securities in connection with a bona fide business acquisition of or by the Company, whether my merger, consolidation, sale of assets, sale or exchange of stock or otherwise, (e) the issuance and sale of Series C preferred stock pursuant to the Series C/C-1 Agreement, or (f) the issuance of warrants to purchase up to an aggregate of 200,000 shares of Series C-1 preferred stock with a per share exercise price equal to at least the fair market value as of the date of issue.

      Pursuant to the Investors’ Rights Agreement and the Company’s certificate of incorporation, (a) holders of shares of common stock are entitled to elect one director, (b) holders of the Company’s Series A preferred stock are entitled to elect one director, (c) holders of the Company’s Series B preferred stock are entitled to elect one director, (d) holders of the Company’s Series C and Series C-1 preferred stock, voting together, are entitled to elect two directors, (e) the holders of the Company’s common stock and Series A preferred stock, voting together, are entitled to elect one director, and (f) holders of the Company’s preferred stock, voting together, are entitled to elect one director. Upon the vote of a majority of the outstanding Series C and Series C-1 preferred stock, the holders of such shares are entitled to elect an additional two directors. The voting rights under the voting agreement terminate upon the consummation of the Company’s sale of its common stock or other securities pursuant to a registration statement under the Securities Act of 1933, as amended, or a Deemed Liquidation Event (as defined in the Company’s certificate of incorporation).

First Refusal and Co-Sale Agreement

      Pursuant to the terms of the First Refusal and Co-Sale Agreement dated February 28, 2004 by and among the Company, its founders and its preferred stockholders (the “Co-Sale Agreement”), the Company and its preferred stockholders, if and to the extent the Company waives its right of first refusal, have a right of first refusal with respect to any shares of capital stock of the Company proposed to be sold by the Company’s founders, with a right of oversubscription for preferred stockholders of shares unsubscribed by the other preferred stockholders. Before any founder may sell capital stock that is not otherwise purchased by the Company or its preferred stockholders pursuant to the right of first refusal, the founder must also give the preferred stockholders an opportunity to participate in such sale on a basis proportionate to the amount of securities held by the founder and those held by the participating preferred stockholders. All rights under the right of first refusal and co-sale agreement terminate upon the consummation of the Company’s sale of its common stock or other securities pursuant to a registration statement under the Securities Act of 1933, as amended, or a Deemed Liquidation Event (as defined in the Company’s certificate of incorporation).

F-30

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

      Preferred stock activity was as follows:

	Series A					Series B					Series C
	Shares		Amount			Shares		Amount			Shares		Amount
Balance, December 31, 2002		750,000	$	747,380			4,185,411	$	12,556,253			—	$	—
Restatement adjustments		—		—			—		951,208			—		—
Balance, December 31, 2002 (restated)		750,000		747,380			4,185,411		13,507,461			—		—
Beneficial conversion feature (restated)		—		(42,596	)		—		(254,151	)		—		—
Amortization of beneficial conversion feature (restated)		—		4,636			—		40,305			—		—
Balance, December 31, 2003 (restated)		750,000		709,420			4,185,411		13,293,615			—		—
Issued, net of issuance costs		—		—			—		—			7,615,675		18,723,137
Amortization of beneficial conversion feature (restated)		—		37,960			—		213,846			—		—
Balance, December 31, 2004 (restated)		750,000		747,380			4,185,411		13,507,461			7,615,675		18,723,137
Balance, December 31, 2005		750,000	$	747,380			4,185,411	$	13,507,461			7,615,675	$	18,723,137

	Series C-1				Total
	Shares		Amount		Shares		Amount
Balance, December 31, 2002		—	$	—		4,935,411	$	13,303,633
Restatement adjustments		—		—		—		951,208
Balance, December 31, 2002 (restated)		—		—		4,935,411		14,254,841
Beneficial conversion feature (restated)		—		—		—		(296,747	)
Amortization of beneficial conversion feature (restated)		—		—		—		44,941
Balance, December 31, 2003 (restated)		—		—		4,935,411		14,003,035
Issued, net of issuance costs		2,498,833		6,230,879		10,114,508		24,954,016
Amortization of beneficial conversion feature (restated)		—		—		—		251,806
Balance, December 31, 2004 (restated)		2,498,833		6,230,879		15,049,919		39,208,857
Balance, December 31, 2005		2,498,833	$	6,230,879		15,049,919	$	39,208,857

(10) Stock Options

      The Company has adopted the Restore Medical, Inc. 1999 Omnibus Stock Plan (the Plan) that includes both incentive stock options and nonqualified stock options to be granted to employees, officers, consultants, independent contractors, directors, and affiliates of the Company. At December 31, 2005, 1,937,500 shares have been authorized for issuance under this plan. Incentive stock options must be granted at an exercise price not less than the fair

F-31

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

market value of the common stock on the grant date. The options granted to participants owning more than 10% of the Company’s outstanding voting stock must be granted at an exercise price not less than 110% of fair market value of the common stock on the grant date. The options expire on the date determined by the Company’s board of directors, but may not extend more than 10 years from the grant date, while incentive stock options granted to participants owning more than 10% of the Company’s outstanding voting stock expire five years from the grant date.

      The retrospective valuation of shares of the Company’s stock in February 2006 revealed that some previously issued stock options had been granted at less than fair market value. The fair value of the common stock for options granted during 2003, 2004 and 2005 was estimated by the Company’s board of directors with input from an independent valuation performed in February 2006. The Company did not obtain contemporaneous valuations by an unrelated valuation specialist for dates other than January 28, 2004 because, at the time of granting the various stock options during this period, the Company’s efforts were focused on product development and commercialization, and the financial and managerial resources for doing so were limited.

      In 2003 and 2004 stock option grants vested 25% on the first anniversary of the date of grant, and 25% each year thereafter. The vesting period was modified in 2005 such that currently outstanding stock options and new stock option grants vest 25% on the first anniversary of the grant date, with the balance of the shares vesting monthly over the next 3 years thereafter.

      Stock option activity was as follows:

		Shares			Shares			Weighted		Weighted
		Available for			Under			Average		Average
		Grant			Options			Exercise Price		Fair Value
Balance, December 31, 2002			513,462			421,100		$	1.05
	Granted		(148,100	)		148,100			1.10	$	0.32
	Exercised		—			(64,325	)		1.06
	Cancelled		2,188			(2,188	)		1.10
Balance, December 31, 2003			367,550			502,687			1.06
	Granted		(525,875	)		525,875			1.10	$	1.36
	Exercised		—			(4,450	)		1.10
	Cancelled		137,748			(137,748	)		1.10
Balance, December 31, 2004			(20,577	)		886,364			1.08
	Authorized		1,000,000			—
	Granted		(584,700	)		584,700			1.10	$	5.18
	Exercised		—			(33,967	)		1.10
	Cancelled		31,483			(31,483	)		1.10
Balance, December 31, 2005			426,206			1,405,614		$	1.09

F-32

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

      At December 31, 2005, the range of weighted average exercise prices and weighted average remaining contractual life of options were as follows:

	Outstanding						Exercisable
					Weighted						Weighted
			Weighted		Average				Weighted		Average
			Average		Remaining				Average		Remaining
			Exercise		Contractual				Exercise		Contractual
Dates Issued	Shares		Price		Life		Shares		Price		Life
December 1999 - May 2000		24,500	$	0.40		4		24,500	$	0.40		4
June 2000 - December 2005		1,381,114		1.10		9		591,418		1.10		8
		1,405,614	$	1.09		8		615,918	$	1.07		8

      In-the-money options granted during the year ended December 31, 2005 were as follows:

					Fair Value of
	Options		Exercise		Common Stock
Grant Date	Granted		Price		on Grant Date
January 1, 2005		49,250	$	1.10	$	1.88
January 18, 2005		5,000		1.10		2.36
January 25, 2005		5,450		1.10		2.56
February 14, 2005		500		1.10		3.10
March 21, 2005		2,500		1.10		4.06
March 29, 2005		5,000		1.10		4.28
April 1, 2005		1,000		1.10		4.38
April 11, 2005		408,500		1.10		4.72
April 18, 2005		250		1.10		4.98
May 2, 2005		500		1.10		5.48
May 23, 2005		15,000		1.10		6.22
June 6, 2005		500		1.10		6.70
June 30, 2005		2,500		1.10		7.56
July 11, 2005		5,250		1.10		7.74
July 18, 2005		500		1.10		7.86
July 21, 2005		10,000		1.10		7.92
August 1, 2005		10,500		1.10		8.10
September 1, 2005		15,000		1.10		8.64
September 6, 2005		10,000		1.10		8.74
November 15, 2005		37,500		1.10		10.44
		584,700	$	1.10	$	5.18

      At December 31, 2003, 2004 and 2005, the number of options exercisable was 241,255, 291,051 and 615,918, respectively, and the weighted average exercise price was $1.06, $1.04 and $1.07, respectively.

      The Company utilized the traditional Black-Scholes option pricing model to value common stock options. For reporting purposes, stock compensation is included with other employee

F-33

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

payroll and related expenses. No options were issued to independent contractors or consultants in 2003, 2004, and 2005.

(11) Debt Financing Arrangement and Warrant Issuances

      The Company has issued common and preferred stock warrants in connection with various debt financings. The following is a summary of significant financings in the 3-year period ended December 31, 2005, which resulted in warrant issuances:

2002 Debt Financing

      In connection with a debt financing in 2002, the Company issued detachable warrants to acquire 41,667 shares of Series B preferred stock with an original exercise price of $3.00 per share and a 7-year life. The fair value of these warrants at the time of issuance was determined to be $97,457, and was recorded as a debt issuance discount based on a relative fair value allocation of the note and the warrant. This loan to the Company was guaranteed by 3 related parties: MPM Bioventures II, L.P., MPM Bioventures II-QP, L.P., and MPM Bioventures GMBH & Co. Parallel-Beteiligungs KG (collectively, the Guarantors), until the Company closed its Series C financing. In connection with this guarantee, the Company issued the Guarantors warrants to acquire 100,000 shares of Series B preferred stock with an exercise price of $3.00 per share and a seven-year life. The fair value of these warrants at the time of issue was determined to be $233,895. The fair value of the warrants was recorded as a debt issuance discount based on relative fair value allocation of the proceeds to the note and the warrants. The discount on the debt as a result of the issuance of these warrants was amortized over the term of the debt. In March of 2003, the Company issued an additional detachable warrant to the Guarantors for 66,667 shares of Series B preferred stock in consideration of the Guarantors’ continued guarantee of a portion of the loan to the Company. These warrants had an exercise price of $3.00 per share and a seven-year life. The fair value of the warrants at the time of issuance was determined to be $155,306 which was deferred and amortized over the remaining term of the debt. The Company paid off the loan in August 2004. Upon closure of the Series C and Series C-1 financing in 2004, warrants to acquire an aggregate of 208,334 shares of Series B preferred stock were exchanged for 238,545 shares of Series C-1 preferred stock at $2.62 per share. The impact of the exchange of the Series B preferred stock warrants for Series C-1 preferred stock warrants is reflected in the preferred stock warrant gain (loss) in 2004.

2002 Bridge Note

      In 2002, the Company entered into an 8% Bridge Loan Agreement (2002 Bridge Note) with Venturi I LLC (Venturi), a related party to the Company, with an original due date of May 1, 2003. The 2002 Bridge Note was originally exchangeable into the next defined round of equity financing (when and if it occurred) at the fair market price. In June 2003, in consideration of extending the due date of the 2002 Bridge Note to November 1, 2003, the Company issued warrants to acquire 14,040 shares of common stock at $1.10 per share and guaranteed the holders of the debt that the debt would be exchangeable into the next defined round of equity financing at a 25% discount from the fair market price. The fair value of the warrants at the time of issuance was determined to be $925. The Company determined that these modifications to the terms of the debt resulted in an extinguishment of the original debt. The Company recorded the new debt instrument and the new warrants to purchase common stock at their fair values and recognized a loss on the extinguishment of debt of approximately $136,500 within interest expense. The 2002 Bridge Note was later amended on December 9,

F-34

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

2003 to change the due date to December 31, 2003, eliminate the 25% discount conversion feature and change the interest rate from 8% to 12%, retroactive to the original issuance date. In consideration of these amended terms, the Company issued additional warrants to acquire 28,125 shares of common stock and changed the exercise price on the previously issued warrants to acquire 14,040 shares to $0.02 per share. The increase in fair value of the warrants was $40,739, which was recorded as an additional discount on the notes and amortized into interest expense over the remaining term of the notes. For accounting purposes, the December 9, 2003 modification to the 2002 Bridge Note resulted in a troubled debt restructuring gain which was deferred as the remaining principal and interest payments exceeded the carrying value of the 2002 Bridge Note. As a result, no gain or loss was recognized for the December 9, 2003 modifications.

2003 Bridge Notes

      On June 16, 2003, the Company entered into an 8.00% Bridge Loan Agreement (2003 Bridge Notes) with investors that included current stockholders and Company executives. During 2003, the Company borrowed the maximum allowable amount of $5,374,462 pursuant to the 2003 Bridge Notes. Principal and interest were payable on December 31, 2003. The 2003 Bridge Notes were convertible into the next defined round of equity financing at a 25% discount from the fair market price, which was recognized as a contingent beneficial conversion feature that would be recognized upon conversion of the notes to equity. The 2003 Bridge Notes were issued with detachable warrants to acquire 112,000 shares of common stock at $1.10 per share. The warrants expire at the earlier of June 16, 2011 or the consolidation of the Company or the sale of substantially all the Company’s assets. The fair value of the warrants at the time of issuance was determined to be $7,837, which was recorded as a discount on the notes and amortized over the term of the 2003 Bridge Notes as interest expense. On December 9, 2003, the 2003 Bridge Notes were amended to change the interest rate from 8% to 12%, retroactive to the funding date, and the Company issued additional warrants to acquire an additional 223,957 shares of common stock, resulting in warrants to acquire a total of 335,957 shares of common stock. In addition, the contingent beneficial conversion feature was eliminated, and the price of the previously issued warrants was amended from $1.10 per share to $0.02 per share. The resulting increase in fair value of the warrants was recorded as an additional discount of $324,582 on the 2003 Bridge Notes and amortized over the remaining term of the notes as interest expense. For accounting purposes, the December 9, 2003 modification to the 2003 Bridge Notes resulted in a troubled debt restructuring gain, which was deferred as the remaining principal and interest payments exceeded the carrying value of the 2003 Bridge Notes.

      Embedded within the 2003 Bridge Notes was a requirement that if the Company was liquidated, including a sale or merger, prior to the conversion of the 2003 Bridge Notes to equity, the note holders would receive a liquidation preference of three times the original principal amount invested. In effect, the liquidation preference was considered to be a contingently exercisable put that was not considered to be clearly and closely related to the host debt instrument. The Company determined that the liquidation preference in the 2003 Bridge Note was an embedded derivative under SFAS 133, which, was required to be bifurcated and accounted for as a freestanding derivative at fair value. Therefore, the Company allocated $1,509,200 of the total proceeds received upon the issuance of the 2003 Bridge Notes to this put feature and classified it as a liability on the balance sheet. The residual amount of the proceeds was allocated to the 2003 Bridge Notes. The resulting discount on the 2003 Bridges Notes was amortized over the life of the notes as interest expense. At December 31,

F-35

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

2003, the put feature was marked to estimated fair value based on an independent valuation, resulting in a gain of $638,508. Upon the conversion of the 2003 Bridge Notes into Series C-1 preferred stock in March 2004, the put was no longer outstanding and the remaining fair value of the put of $870,692 was recorded as a gain. The impact of the embedded derivative accounting on the statement of operations was a charge for interest expense of $1,509,200 in 2003, and derivative gains of $638,508 and $870,692, for the years ended December 31, 2003 and 2004, respectively.

      The Black-Scholes assumptions used to value the common stock warrants issued in the above transactions were: volatility of 86% to 87%, dividend rate of 0%, risk-free interest rate of 2.68% to 3.85%, and the maximum 7 or 8-year contractual warrant life.

      As described in note 9, the 2002 Bridge Note and the 2003 Bridge Notes, plus accrued interest, were converted into Series C-1 preferred stock in 2004 with no further accounting consequence.

Lighthouse Capital Partners Debt Financing

      In connection with the 2005 Lighthouse debt financing, as amended on March 3, 2006, the Company issued warrants to acquire 95,420 shares of Series C-1 preferred stock and has committed to issue up to an additional 179,389 Series C-1 preferred stock warrants. See footnote 6 for further details.

      Stock warrant activity is as follows:

								Preferred				Preferred					Preferred
			Common					Series A				Series B					Series C-1
			Shares			Price(1)		Shares		Price(1)		Shares			Price(1)		Shares		Price(1)
Balance as of:
	December 31, 2002			60,000		$	1.10		9,191	$	1.00		143,494		$	3.00		—	$
		Granted		509,162			0.30		—				66,667			3.00		—
		Cancelled		(126,040	)		1.10		—				—					—
		Forfeited		(9,600	)		1.10		—				—					—
	December 31, 2003			433,522			0.16		9,191		1.00		210,161			3.00		—
		Exchanged		—					—				(208,334	)		3.00		238,545		2.62
	December 31, 2004			433,522			0.16		9,191		1.00		1,827			3.00		238,545
		Granted		—					—				—					95,420		2.62
	December 31, 2005			433,522		$	0.16		9,191	$	1.00		1,827		$	3.00		333,965	$	2.62

(1)  Weighted average price

      All warrants issued by the Company are fully vested. All classes of preferred stock warrants will be converted into common stock warrants upon a qualified initial public offering with a share price of at least $7.86 per share, and aggregate net proceeds to the Company of at least $20 million, as defined in the Company’s certificate of incorporation. At December 31, 2005, the aggregate liquidation preference of preferred stock issuable upon exercise of preferred stock warrants was $889,660. Upon the completion of an initial public offering, all classes of preferred stock warrants will be converted into 257,573 common warrants with terms based on then current conversion ratio of preferred stock to common stock for each respective warrant. See note 17 to these financial statements for a description of a potential subsequent event related to an initial public offering of the Company’s common stock.

F-36

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

(12) Preferred Stock Warrants Subject to Redemption

      In 2003, the Company was required to adopt SFAS 150 and classify preferred stock warrants as liabilities as Series A, Series B and Series C and Series C-1 preferred stock have liquidation rights upon the sale or merger of the Company. The Company recorded a cumulative adjustment benefit for the adoption of SFAS 150 on July 1, 2003 of $266,989. The Company records adjustments in the statement of operations for the change in the fair value of the preferred stock warrants. These adjustments were a gain (loss) of $9,278, $128,465 and ($572,023) in 2003, 2004 and 2005, respectively. Preferred stock warrant fair values were retrospectively determined by an independent valuation. The option-pricing method was applied to allocate the enterprise value, at various historical dates, to the various equity holders.

(13) Related-Party Transactions

      Effective January 1, 2002, the Company entered into a consulting agreement with Venturi Development, Inc. (VDI), whose then stockholders and officers are investors in the Company. The consulting agreement provided for the consultants to receive compensation, in the form of cash for services provided. The total cash payments in 2003 were $444,765. The Company made no payments to VDI in 2004 and 2005. The majority of the consulting services provided by VDI were recorded as research and development and clinical and regulatory expenses.

      The Company paid Venturi a monthly service fee for the use and maintenance of certain equipment. Total fees paid in 2003, 2004 and 2005 were $64,704, $12,000 and $0, respectively.

      In October 2002 the Company borrowed $675,000 in the form of a bridge loan agreement from Venturi as discussed in note 11. In June 2003, the Company entered into a bridge loan agreement with certain investors, including current stockholders and Company executives, including Mark B. Knudson, Ph.D, the Company’s chairman of the board of directors, which provided up to $5,374,462 in aggregate borrowings through August 2003.

(14) Commitments and Contingencies

Leases

      Assets held under capital leases are included in property and equipment and are charged to depreciation and interest over the life of the lease. Operating leases are not capitalized and lease rentals are expensed on a straight-line basis over the life of the lease.

      On October 1, 2005, the Company entered into a non-cancelable operating lease agreement for office/warehouse space. The lease expires on September 30, 2010, and the Company has an option to renew for an additional five years. The Company has sublet part of the office/warehouse space for a three-year period beginning on October 1, 2005 to a related party, EnteroMedics, Inc., whose president and C.E.O., Mark B. Knudson, Ph.D, is the chairman of the Company’s board of directors. Previously, the Company had entered into a non-cancelable sublease agreement with a related party for office/warehouse space that expired on September 30, 2005. Rent expense totaled $218,926, $233,314 and $263,556 for the years ended December 31, 2003, 2004 and 2005, respectively.

F-37

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

      The following is a schedule of total future minimum lease payments due as of December 31, 2005:

		Operating			Capital
		Leases			Leases
	2006	$	371,581		$	7,486
	2007		375,381			7,486
	2008		379,181			7,486
	2009		382,981			5,614
	2010		287,766			—
Total future minimum lease payments			1,796,890			28,072
Less amounts representing interest at 9.35%			—			(4,473	)
Total capital lease obligations					$	23,599
Less: noncancelable sublease payments	2006		(87,611	)
	2007		(91,404	)
	2008		(69,087	)
			(248,102	)
Minimum lease payments		$	1,548,788

(15) Employment Agreements

      The Company has entered into employment agreements with certain key employees providing for an annual salary, stock options and such benefits in the future as may be approved by the board of directors. Certain agreements also contain provisions pursuant to which upon a “change of control” of the Company, the applicable employees will receive severance payments equal to their monthly salary for 12 months. The aggregated value of these “change of control” provisions was approximately $415,000 at December 31, 2005. In addition, the agreement with J. Robert Paulson, Jr., the Company’s chief executive officer, entitles Mr. Paulson to receive a transaction bonus equal to four percent of the net proceeds payable to the holders of the Company’s stock, options or warrants in the transaction, in the event of a “change of control”. This condition is effective as long as shares of the Company’s preferred stock remain outstanding, but only if the outstanding preferred stockholders receive at least one time their original purchase price for their shares in the transaction after payment of the transaction bonus.

(16) Retirement Plan

      The Company has a 401(k) profit sharing plan that provides retirement benefits to all full-time employees. Eligible employees may contribute a percentage of their annual compensation, subject to Internal Revenue Service limitations. The Company’s matching is at the discretion of the Company’s Board of Directors. As of December 31, 2003, 2004 and 2005, the Company did not provide for matching of employees’ contributions.

F-38

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

(17) Subsequent Events

Amendment of Series C Preferred Stock Conversion Ratio and Reverse Stock Split in the Event of a Qualified Public Offering

      Effective as of February 28, 2006, the Company’s board of directors and a majority of the Company’s stockholders authorized and approved the offering and sale of shares of the Company’s common stock for a maximum aggregate offering of up to $50 million in an initial public offering (IPO). This offering will constitute a “qualified” IPO pursuant to the Company’s certificate of incorporation, which will trigger the automatic conversion feature of the Company’s outstanding preferred stock pursuant to the Company’s Certificate of Incorporation.

      Prior to the completion of the IPO, the Company will amend its Certificate of Incorporation to change the conversion price of the Series C and Series C-1 preferred stock from $2.62 per share to $1.74 per share. As a result of the change in the conversion price of Series C and C-1 preferred stock, the outstanding potential common stock will increase by 2,649,864 shares, including 92,172 common shares issuable pursuant to the Series C-1 preferred stock warrants. Upon the closing of the IPO, (a) all Series A, B, C and C-1 preferred stock and preferred stock warrants will automatically convert into Company common stock and common stock warrants, respectively, at the then current conversion prices; and (b) the Company will effect a 1-for-2 reverse split of all issued and outstanding Company common stock.

      All common stock share and per share amounts reported in the Company’s historical financial statements have been adjusted to reflect the impact of the common stock reverse split. The conversion prices of the preferred stock into common stock have not been adjusted to reflect the change in the underlying common stock reverse split as the reverse split will occur after all preferred shares have been converted to common stock.

F-39

You should rely only on the information contained in this prospectus. Neither we nor the underwriters have authorized anyone to provide you with information different from that contained in this prospectus. Neither we nor the underwriters are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common stock.

TABLE OF CONTENTS

	Page
Prospectus Summary		1
Risk Factors		6
Special Note Regarding Forward-Looking Statements		19
Use of Proceeds		20
Dividend Policy		20
Capitalization		21
Dilution		22
Selected Consolidated Financial Data		23
Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
Business		41
Management		61
Principal Stockholders		72
Related-Party Transactions		75
Description of Capital Stock		79
Shares Eligible for Future Sale		84
Material United States Federal Tax Consequences for Non-United States Holders of Our Common Stock		86
Underwriting		89
Legal Matters		92
Experts		92
Where You Can Find More Information		92
Index to Consolidated Financial Statements		F-1

Until           , 2006 (25 days after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

Restore Medical, Inc.

              Shares

Common Stock

Deutsche Bank Securities

RBC Capital Markets

First Albany Capital

Prospectus

          , 2006

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 commission, payable by us in connection with the sale of common stock being registered. All amounts are estimated except the fees payable to the SEC and the National Association of Securities Dealers, Inc.

SEC registration fee	$	5,350
National Association of Securities Dealers, Inc. fee		5,500
Nasdaq National Market listing fee		100,000
Printing and mailing		*
Legal fees and expenses		*
Accounting fees and expenses		*
Transfer agent fees		*
Miscellaneous		*
	$	*

*  To be completed by amendment.

Item 14. Indemnification of Directors and Officers

      Article 6 of our amended and restated charter, to become effective upon the completion of the offering made pursuant to this registration statement, provides that no director of our company shall be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duty as a director, notwithstanding any provision of law imposing such liability, except for liability (i) for any breach of the director’s duty of loyalty to our company or its stockholders, (ii) for acts or omissions not in good faith or which involved intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit.

      Article 8 of our bylaws provides that we will indemnify each person who was or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of our company or is or was serving at the request of our company as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent (all such persons are referred to as an indemnitee), shall be indemnified and held harmless by our company , against all expenses, liability and loss (including attorneys’ fees, judgments, fines, penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such indemnitee in connection with such action, suit or proceeding and any appeal therefrom, if such indemnitee acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, our best interests, and, with respect to any criminal action or proceeding, he or she had no reasonable cause to believe his or her conduct was unlawful. Our bylaws provide that we will indemnify any indemnitee seeking indemnity in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by our board of directors. We will indemnify the indemnitee for expenses incurred in defending any such

II-1

proceeding in advance of its final disposition to the extent not prohibited by law. Such indemnification will only be made if the indemnitee acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, our best interests, except that no indemnification shall be made with respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to us, unless a court determines that, despite such adjudication but in view of all of the circumstances, he or she is entitled to indemnification of such expenses. Expenses must be advanced to an indemnitee under certain circumstances.

      As a condition precedent to the right of indemnification, an indemnitee must give us notice of the action for which indemnity is sought and we have the right to participate in such action or assume the defense thereof.

      Article 8 of our bylaws further provides that the indemnification provided therein is not exclusive, and provides that no amendment, termination or repeal of the relevant provisions of the Delaware law statute or any other applicable law will diminish the rights of any Indemnitee to indemnification under our charter.

      Section 145 of the Delaware law statute provides that a corporation has the power to indemnify a director, officer, employee, or agent of the corporation and certain other persons serving at the request of the corporation in related capacities against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlements actually and reasonably incurred by the person in connection with an action, suit or proceeding to which he or she is or is threatened to be made a party by reason of such position, if such person 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, in any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful, except that, in the case of actions brought by or in the right of the corporation, no indemnification shall be made with respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or other adjudicating court determines that, despite the adjudication of liability but in view of all of the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses that the Court of Chancery or such other court shall deem proper.

      We have obtained director and officer insurance providing for indemnification for our directors and officers for certain liabilities and expect that, prior to the consummation of this offering, such insurance will provide for indemnification of our directors and officers for liabilities under the Securities Act.

      In the underwriting agreement we enter into in connection with the sale of common stock being registered hereby, the underwriters will agree to indemnify, under certain conditions, us, our directors, our officers and persons who control us within the meaning of the Securities Act against certain liabilities.

Item 15. Recent Sales of Unregistered Securities

      Set forth below is information regarding shares of capital stock, warrants and promissory notes issued and options granted by us within the past three years. Also included is the consideration, if any, received by us for such shares, warrants, promissory notes and options and information relating to the section of the Securities Act, or rules of the SEC, under which exemption from registration was claimed. Some of the transactions described below involved directors, officers and five percent stockholders. The transactions described below have not been adjusted to reflect the 1-for-2 reverse stock split which will occur before the completion of this offering.

II-2

      Since January 1, 2003, we have granted options under our 1999 plan to purchase an aggregate of 2,945,350 shares of our common stock at an exercise price of $0.55 per share to our employees, officers, directors and advisors.

      Since January 1, 2003, we have issued an aggregate of 205,983 shares of our common stock to our employees, officers, directors and advisors pursuant to the exercise of stock options for an aggregate consideration of $110,490.65.

      On March 12, 2003, we issued 66,667 warrants for our Series B preferred stock, which were converted into Series C warrants at the completion of the Series C financing in 2004. These warrants were issued to MPM BioVentures II, L.P., MPM BioVentures II-QP, L.P., MPM BioVentures GmbH & Co. Parallel-Beteiligungs KG an d MPM Asset Management Investors 2000 B LLC (referred to collectively as MPM Capital) as consideration for a related party’s guarantee of a loan.

      On April 1, 2003, we issued a warrant to purchase 10,000 shares of our common stock to Innovative Medical Products Consultants, GmbH in exchange for consulting services provided to us.

      On June 12, 2003 we issued warrants to purchase 28,080 shares of our common stock to Venturi I, LLC in exchange for an amendment to the promissory note (2002 Bridge Note) issued by us pursuant to the October 31, 2002, 8% Bridge Loan Agreement. The 2002 Bridge Note was amended to change the due date to November 1, 2003.

      On June 16, 2003, we entered into an 8.00% Bridge Loan Agreement (2003 Bridge Agreement) with MPM Capital, Charter Ventures, Eventyr Investments and certain individuals. During 2003, we issued promissory notes totaling $5,374,462 (2003 Bridge Notes) pursuant to the 2003 Bridge Agreement.

      The 2003 Bridge Notes were issued with detachable warrants to acquire 224,000 shares of our common stock at $0.55 per share. On December 9, 2003 we issued warrants to purchase 447,914 shares of our common stock to the parties holding 2003 Bridge Notes resulting in a total of 671,914 common stock warrants. The 447,914 additional warrants were issued in connection with an amendment to our 2003 Bridge Notes that eliminated the contingent beneficial conversion feature and amended the price of the previously issued warrants from $0.55 to $0.01 per share.

      On December 9, 2003, the promissory note originally issued by us to Venturi I, LLC on October 31, 2002 was amended to eliminate the beneficial conversion feature and change the interest rate from 8% to 12% retroactive to the original issuance date and extend the maturity date to December 31, 2003. In connection with this amendment, on December 9, 2003, we also issued 56,250 additional common stock warrants to Venturi I, LLC resulting in an amended warrant to purchase a total of 84,330 shares of our common stock. In addition, the exercise price of the amended warrant changed from $0.55 to $0.01 per share.

      In the first quarter of 2004, we entered into an agreement with MPM Capital, Charter Ventures L.P., Eventyr Investments, Bessemer Venture Partners Christopher Gabrieli, TH Lee Putnam Investment Trust, General Electric Pension Trust, NGEN, 3V SourceOne, DuPont Pension Trust, Wilton Private Equity and certain other individuals, to sell, in a private placement, an aggregate of 7,615,675 shares of our Series C preferred stock and an aggregate of 2,498,833 shares of our Series C-1 preferred stock. The total aggregate offering price for this sale was $26,500,547.33.

      In the first quarter of 2004, in connection with our Series C and Series C-1 preferred stock financing we issued an aggregate of 238,545 warrants to purchase our Series C-1 preferred stock to Comerica Bank and MPM Capital, which replaced the warrants to purchase Series B

II-3

preferred stock that were issued on March 12, 2003 and the warrants to purchase our Series B preferred stock issued December 19, 2002.

      In March 2005, we obtained a $5,000,000 loan facility for general corporate purposes from Lighthouse Capital Partners (Lighthouse). On December 30, 2005, we borrowed $2,000,000 in return for the issuance of promissory notes to Lighthouse.

      On March 23, 2005 we issued a warrant to purchase 95,420 shares of our Series C-1 preferred stock to Lighthouse pursuant to the loan agreement. On March 3, 2006, we issued a warrant to purchase 103,053 shares of our Series C-1 preferred stock to Lighthouse pursuant to the loan agreement.

      The issuance of stock options and the common stock issuable upon the exercise of stock options as described in this Item 15 were issued pursuant to written compensatory plans or arrangements with our employees, officers, directors and advisors, in reliance on the exemption provided by Rule 701 promulgated under Section 3(b) of the Securities Act. All recipients either received adequate information about us or had access, through employment or other relationships, to such information.

      All other issuances described above were exempt from registration pursuant to Section 4(2) of the Securities Act. With respect to each transaction listed above, no general solicitation was made by either the company or any person acting on its behalf; the securities sold are subject to transfer restrictions, and the certificates for the shares contained an appropriate legend stating such securities have not been registered under the Securities Act and may not be offered or sold absent registration or pursuant to an exemption therefrom. No underwriters were involved in connection with the sales of securities referred to in this Item 15.

Item 16. Exhibits

(a) Exhibits

Exhibit
Number	Description
1.1*	Form of Underwriting Agreement
3.1	Amended and Restated Certificate of Incorporation, as amended as currently in effect
3.2*	Second Amended and Restated Certificate of Incorporation, to become effective upon completion of the offering
3.3	Bylaws, as currently in effect
3.4*	Amended and Restated Bylaws, to become effective upon completion of the offering
4.1*	Specimen certificate for shares of common stock
4.2	Investors’ Rights Agreement, dated as of January 28, 2004, by and between the Registrant and the parties named therein
4.3	First Amendment to Investors’ Rights Agreement, dated as of March 17, 2005, by and between the Registrant and the parties named therein
4.4	Waiver to Investors’ Rights Agreement, dated as of March 30, 2005, by and between the Registrant and the parties named therein
5.1*	Opinion of Dorsey & Whitney LLP
10.1	Commercial Lease, dated as of August 5, 2005, by and between Roseville Properties Management Company as agent for Commers-Klodt III and the Registrant

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Exhibit
Number	Description
10.2	Loan and Security Agreement No. 4541, dated as of March 23, 2005, by and between Lighthouse Capital Partners V, L.P. and the Registrant
10.2A	Amendment No. 1 to the Loan and Security Agreement No. 4541 dated as of March 23, 2005, by and between Lighthouse Capital Partners V, L.P. and the Registrant, dated March 3, 2006.
10.3†	Employment and Change in Control Agreement, dated as of April 11, 2005, by and between the Registrant and J. Robert Paulson, Jr.
10.4†	Change in Control Agreement, dated as of December 19, 2002, by and between the Registrant and Edward W. Numainville
10.5	Separation Agreement, dated as of August 13, 2004, by and between the Registrant and Susan L. Critzer
10.6	Amendment to Separation Agreement, dated August 13, 2004, between the Registrant and Susan L. Critzer, dated February 2, 2005
10.7†	1999 Omnibus Stock Plan
10.8†	Standard form of Incentive Stock Option Agreement pursuant to the 1999 Omnibus Stock Plan
10.9†	Standard form of Non-Qualified Stock Option Agreement pursuant to the 1999 Omnibus Stock Plan.
10.10†	Management Incentive Plan
10.11†*	Executive Compensation Plan
10.12	EU Authorized Representative Contract for Services, dated as of June 16, 2003, by and between Quality First International and the Registrant
10.13	Distribution Agreement, dated as of January 20, 2005, by and between the Registrant and Sonomed Ltd.
10.14	Research and Development Agreement, dated as of August 11, 2000, by and between the Registrant and Advanced Composite Industries, Inc.
10.15	Assignment and Grant Back of License Agreement, dated as of November 28, 2001, by and between the Registrant and Venturi Development Inc.
14.1	Code of Conduct and Ethics, to become effective upon completion of the offering
23.1	Consent of KPMG LLP, Independent Registered Public Accounting Firm
23.2*	Consent of Dorsey & Whitney LLP (included in Exhibit 5.1)
24.1	Powers of Attorney (included on page II-7)

*  To be filed by amendment.

†  Management contract or compensatory plan or arrangement.

     (b) Financial Statements Schedules.

      None.

Item 17. Undertakings

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

      Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed

II-5

in the 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 the controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

      The undersigned registrant hereby undertakes that:

      (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of Prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(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 of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

II-6

SIGNATURES

      Pursuant to the requirements of the Securities Act of 1933, 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 St. Paul, Minnesota, as of March 10, 2006.

RESTORE MEDICAL, INC.

By  /s/ J Robert Paulson, Jr.

J. Robert Paulson, Jr.

President and Chief Executive Officer

      We, the undersigned directors and/or officer of Restore Medical, Inc. (the “Company”), hereby severally constitute and appoint J. Robert Paulson, Jr. our true and lawful attorney to sign for us and in our names in the capacities indicated below the Registration Statement on Form S-1 filed herewith, and any and all pre-effective and post-effective amendments to said registration statement, and any registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, in connection with the registration under the Securities Act of 1933, as amended, of equity securities of the Company, and to file or cause to be filed the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney 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 to all intents and purposes as each of them might or could do in person, and hereby ratifying and confirming all that said attorney shall do or cause to be done by virtue of this Power of Attorney.

      Pursuant to the requirements of the Securities Act of 1933, this Registration Statement on Form S-1 has been signed by the following persons in the capacities indicated as of March 10, 2006.

Signature	Title
/s/ J. Robert Paulson, Jr. J. Robert Paulson, Jr.	President, Chief Executive Officer and Director (principal executive, accounting and financial officer)
/s/ Ashley L. Dombkowski, Ph.D Ashley L. Dombkowski, Ph.D	Director
/s/ Luke Evnin, Ph.D Luke Evnin, Ph.D	Director
/s/ Mark B. Knudson, Ph.D Mark B. Knudson, Ph.D	Chairman
/s/ Stephen Kraus Stephen Kraus	Director
/s/ John Schulte John Schulte	Director

II-7

EXHIBIT INDEX

Exhibit
Number	Description
1.1*	Form of Underwriting Agreement
3.1	Amended and Restated Certificate of Incorporation, as amended as currently in effect
3.2*	Second Amended and Restated Certificate of Incorporation, to become effective upon completion of the offering
3.3	Bylaws, as currently in effect
3.4*	Amended and Restated Bylaws, to become effective upon completion of the offering
4.1*	Specimen certificate for shares of common stock
4.2	Investors’ Rights Agreement, dated as of January 28, 2004, by and between the Registrant and the parties named therein
4.3	First Amendment to Investors’ Rights Agreement, dated as of March 17, 2005, by and between the Registrant and the parties named therein
4.4	Waiver to Investors’ Rights Agreement, dated as of March 30, 2005, by and between the Registrant and the parties named therein
5.1*	Opinion of Dorsey & Whitney LLP
10.1	Commercial Lease, dated as of August 5, 2005, by and between Roseville Properties Management Company as agent for Commers-Klodt III and the Registrant
10.2	Loan and Security Agreement No. 4541, dated as of March 23, 2005, by and between Lighthouse Capital Partners V, L.P. and the Registrant
10.2A	Amendment No. 1 to the Loan and Security Agreement No. 4541 dated as of March 23, 2005, by and between Lighthouse Capital Partners V, L.P. and the Registrant, dated March 3, 2006.
10.3†	Employment and Change in Control Agreement, dated as of April 11, 2005, by and between the Registrant and J. Robert Paulson, Jr.
10.4†	Change in Control Agreement, dated as of December 19, 2002, by and between the Registrant and Edward W. Numainville
10.5	Separation Agreement, dated as of August 13, 2004, by and between the Registrant and Susan L. Critzer
10.6	Amendment to Separation Agreement, dated August 13, 2004, between the Registrant and Susan L. Critzer, dated February 2, 2005
10.7†	1999 Omnibus Stock Plan
10.8†	Standard form of Incentive Stock Option Agreement pursuant to the 1999 Omnibus Stock Plan
10.9†	Standard form of Non-Qualified Stock Option Agreement pursuant to the 1999 Omnibus Stock Plan.
10.10	Management Incentive Plan
10.11† *	Executive Compensation Plan
10.12	EU Authorized Representative Contract for Services, dated as of June 16, 2003, by and between Quality First International and the Registrant
10.13	Distribution Agreement, dated as of January 20, 2005, by and between the Registrant and Sonomed Ltd.
10.14	Research and Development Agreement, dated as of August 11, 2000, by and between the Registrant and Advanced Composite Industries, Inc.
10.15	Assignment and Grant Back of License Agreement, dated as of November 28, 2001, by and between the Registrant and Venturi Development Inc.
14.1	Code of Conduct and Ethics, to become effective upon completion of the offering
23.1	Consent of KPMG LLP, Independent Registered Public Accounting Firm
23.2*	Consent of Dorsey & Whitney LLP (included in Exhibit 5.1)
24.1	Powers of Attorney (included on page II-7)

*  To be filed by amendment.

†  Management contract or compensatory plan or arrangement.

EX-3.1

Exhibit 3.1

AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
RESTORE MEDICAL, INC.

Pursuant to Sections 242 and 245
of the General Corporation Law
of the State of Delaware

     Restore Medical, Inc., a Delaware corporation (the “corporation”), does hereby certify that this Amended and Restated Certificate of Incorporation of Restore Medical, Inc. was adopted in accordance with the Sections 242 and 245 of the General Corporation Law of the State of Delaware and that the corporation’s original Certificate of Incorporation was filed with the Delaware Secretary of State on April 8, 2004.

     To form a Delaware business corporation under and pursuant to the Delaware General Corporation Law of the State of Delaware (“Delaware General Corporation Law”), the following certificate of incorporation (the “Certificate”) is adopted:

ARTICLE I

     The name of the corporation is “Restore Medical, Inc.”

ARTICLE II

     The address of the registered office of the corporation is The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, DE 19801, County of New Castle, and the name of its registered agent at that address is The Corporation Trust Company.

ARTICLE III

     The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the Delaware General Corporation Law.

ARTICLE IV

     A. Authorization of Stock. The aggregate number of authorized shares of the corporation is 41,215,000 shares. The total number of shares of common stock authorized to be issued is 23,500,000, par value $.01 per share (the “Common Stock”). The total number of shares of preferred stock authorized to be issued is 17,715,000, par value $.01 per share (the “Preferred Stock”), of which 775,000 are designated as “Series A Preferred Stock,” 4,500,000 shares are designated as “Series B Preferred Stock,” 9,500,000 shares are designated as “Series C Preferred Stock” and 2,940,000 shares are designated as “Series C-1 Preferred Stock.” Unless

otherwise designated in this Certificate or by the Board of Directors, all issued shares shall be deemed Common Stock with equal rights and preferences.

     B. Rights, Preferences and Restrictions of Preferred Stock. The rights, preferences, privileges and restrictions granted to and imposed on the Preferred Stock are as set forth below in this Article IV(B).

     1. Dividend Provisions

     (a) The holders of shares of Series C Preferred Stock and Series C-1 Preferred Stock shall be entitled to receive dividends, out of any assets legally available therefor, prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of this corporation) on the Series A Preferred Stock, Series B Preferred Stock or Common Stock of this corporation, at the Series C/C-1 Dividend Rate (as defined below), payable when, as and if declared by the Board of Directors. Such dividends shall not be cumulative. The holders of the outstanding Series C Preferred Stock and Series C-1 Preferred Stock can waive any dividend preference that such holders shall be entitled to receive under this Section 1 upon the affirmative vote or written consent of the holders of a majority of the shares of Series C Preferred Stock then outstanding, voting as a separate series (in the case of a waiver with respect to any dividend preference on shares of Series C Preferred Stock), and the holders of a majority of the shares of Series C-1 Preferred Stock then outstanding, voting as a separate series (in the case of a waiver with respect to any dividend preference on shares of Series C-1 Preferred Stock). For purposes of this subsection 1(a), “Series C/C-1 Dividend Rate” shall mean $0.2096 per annum for each share of Series C Preferred Stock and Series C-1 Preferred Stock (as adjusted for any stock splits, stock dividends, combinations, subdivisions, recapitalizations or the like).

     (b) After payment of the dividends provided for in subsection 1(a), the holders of shares of Series A Preferred Stock and Series B Preferred Stock shall be entitled to receive dividends, out of any assets legally available therefor, prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of this corporation) on the Common Stock of this corporation, at the Series A/B Dividend Rate (as defined below), payable when, as and if declared by the Board of Directors. Such dividends shall not be cumulative. The holders of the outstanding Series A Preferred Stock and Series B Preferred Stock can waive any dividend preference that such holders shall be entitled to receive under this Section 1 upon the affirmative vote or written consent of the holders of at least a majority of the shares of Series A Preferred Stock and Series B Preferred Stock then outstanding (voting together as a single class and not as separate series, and on an as-converted basis). For purposes of this subsection 1(b), “Series A/B Dividend Rate” shall mean (i) $0.08 per annum for each share of Series A Preferred Stock and (ii) $0.24 per annum for each share of Series B Preferred Stock (each as adjusted for any stock splits, stock dividends, combinations, subdivisions, recapitalizations or the like).

     (c) After payment of the dividends provided for in subsections 1(a) and 1(b), dividends shall be payable on the Preferred Stock out of funds legally available for the

2

declaration of dividends, when, as and if declared by the Board of Directors and shall be distributed among all holders of Common Stock and Preferred Stock in proportion to the number of shares of Common Stock that would be held by each such holder if all shares of Preferred Stock were converted to Common Stock at then effective conversion rate for each series of Preferred Stock.

     2. Liquidation Preference.

     (a) In the event of any Liquidation Event (as defined below), either voluntary or involuntary, the holders of Series C Preferred Stock shall be entitled to receive, prior and in preference to any distribution of the proceeds of such Liquidation Event (the “Proceeds”) to the holders of Series A Preferred Stock, Series B Preferred Stock, Series C-1 Preferred Stock or Common Stock by reason of their ownership thereof, an amount per share equal to 200% of the Series C Original Issue Price (as defined below), plus declared but unpaid dividends on such share. If, upon the occurrence of such event, the Proceeds thus distributed among the holders of the Series C Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then the entire Proceeds legally available for distribution shall be distributed ratably among the holders of the Series C Preferred Stock in proportion to the full preferential amount that each such holder is otherwise entitled to receive under this subsection (a). The “Series C Original Issue Price” shall mean $2.62 per share (as adjusted for any stock splits, stock dividends, combinations, subdivisions, recapitalizations or the like with respect to such series of Preferred Stock).

     (b) Upon the completion of the distribution required by subsection (a) of this Section 2, the holders of Series C-1 Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of this corporation to the holders of Series A Preferred Stock, Series B Preferred Stock or Common Stock by reason of their ownership thereof, an amount per share equal to 200% of the Series C-1 Original Issue Price (as defined below), plus declared but unpaid dividends on such share. If upon the occurrence of such event, the assets and funds thus distributed among the holders of the Series C-1 Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then the entire Proceeds legally available for distribution after payment of any amounts under subsection (a) shall be distributed ratably among the holders of Series C-1 Preferred Stock in proportion to the full preferential amount each such holder is otherwise entitled to receive under this subsection (b). The “Series C-1 Original Issue Price” shall mean $2.62 per share (as adjusted for any stock splits, stock dividends, combinations, subdivisions, recapitalizations or the like with respect to such series of Preferred Stock).

     (c) Upon the completion of the distributions required by subsections (a) and (b) of this Section 2, the holders of Series A Preferred Stock and Series B Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of this corporation to the holders of Common Stock by reason of their ownership thereof, (i) in the case of Series A Preferred Stock, an amount per share equal to the Series A Original Issue Price (as defined below) for each outstanding share of Series A Preferred Stock, plus declared but unpaid dividends on such share, and (ii) in the case of Series B Preferred Stock, an amount per share equal to the Series B Original Issue Price (as defined below) for each outstanding share of Series B Preferred Stock, plus declared but unpaid dividends on such share. If upon the

3

occurrence of such event, the assets and funds thus distributed among the holders of the Series A Preferred Stock and Series B Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then the entire Proceeds legally available for distribution after payment of any amounts under subsections (a) and (b) shall be distributed ratably among the holders of Series A Preferred Stock and Series B Preferred Stock in proportion to the full preferential amount each such holder is otherwise entitled to receive under this subsection (c). The “Series A Original Issue Price” shall be equal to $1.00 per share and the “Series B Original Issue Price” shall be equal to $3.00 per share (each as adjusted for any stock splits, stock dividends, combinations, subdivisions, recapitalizations or the like with respect to such series of Preferred Stock).

     (d) Upon the completion of the distributions required by subsections (a), (b) and (c) of this Section 2, the remaining Proceeds available for distribution to stockholders shall be distributed among the holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series C-1 Preferred Stock and Common Stock pro rata based on the number of shares of Common Stock held by each (assuming full conversion of all such Preferred Stock at the then applicable conversion rate) until the holders of Series A Preferred Stock shall have received the Series A Participation Cap (as defined below), the holders of Series B Preferred Stock shall have received the Series B Participation Cap (as defined below), the holders of Series C Preferred Stock shall have received the Series C Participation Cap (as defined below) and the holders of Series C-1 Preferred Stock shall have received the Series C-1 Participation Cap (as defined below); thereafter, if Proceeds remain, the holders of Common Stock of this corporation shall receive all of the remaining Proceeds legally available for distribution pro rata based on the number of shares of Common Stock held by each. The “Series A Participation Cap” shall mean $3.00 per share for the Series A Preferred Stock (as adjusted for any stock splits, stock dividends, combinations, subdivisions, recapitalizations or the like with respect to such series of Preferred Stock), which includes amounts paid pursuant to subsection (c) of this Section 2. The “Series B Participation Cap” shall mean $9.00 per share for the Series B Preferred Stock (as adjusted for any stock splits, stock dividends, combinations, subdivisions, recapitalizations or the like with respect to such series of Preferred Stock), which includes amounts paid pursuant to subsection (c) of this Section 2. The “Series C Participation Cap” shall mean $7.86 per share for the Series C Preferred Stock (as adjusted for any stock splits, stock dividends, combinations, subdivisions, recapitalizations or the like with respect to such series of Preferred Stock), which includes amounts paid pursuant to subsection (a) of this Section 2. The “Series C-1 Participation Cap” shall mean $7.86 per share for the Series C-1 Preferred Stock (as adjusted for any stock splits, stock dividends, combinations, subdivisions, recapitalizations or the like with respect to such series of Preferred Stock), which includes amounts paid pursuant to subsection (b) of this Section 2.

     (e) Notwithstanding the above, for purposes of determining the amount each holder of shares of Preferred Stock is entitled to receive with respect to a Liquidation Event, each such holder of shares of a series of Preferred Stock shall be deemed to have converted (regardless of whether such holder actually converted) such holder’s shares of such series into shares of Common Stock immediately prior to the Liquidation Event if, as a result of an actual conversion, such holder would receive, in the aggregate, an amount greater than the amount that would be distributed to such holder if such holder did not convert such series of Preferred Stock into shares of Common Stock. If any such holder shall be deemed to have converted shares of

4

Preferred Stock into Common Stock pursuant to this paragraph, then such holder shall not be entitled to receive any distribution that would otherwise be made to holders of Preferred Stock that have not converted (or have not been deemed to have converted) into shares of Common Stock.

     (f) (i) For purposes of this Section 2 and Section 6, a “Liquidation Event” shall include (A) the closing of the sale, transfer, exclusive licensing or other disposition of all or substantially all of this corporation’s assets or intellectual property, (B) the consummation of the merger or consolidation of this corporation with or into another entity (except a merger or consolidation in which the holders of capital stock of this corporation immediately prior to such merger or consolidation (each a “Pre-Merger Stockholder”) continue to hold at least 50% of the voting power of the capital stock of this corporation or the surviving or acquiring entity; provided that if as a result of a merger or consolidation, a single Pre-Merger Stockholder together with its affiliates owns at least 50% of the voting power of the capital stock of this corporation or the surviving or acquiring entity, such merger or consolidation shall be a Liquidation Event), (C) the closing of the transfer (whether by merger, consolidation or otherwise), in one transaction or a series of related transactions, to a person or group of affiliated persons (other than an underwriter of this corporation’s securities), of this corporation’s securities if, after such closing, such person or group of affiliated persons would hold 50% or more of the outstanding voting stock of this corporation (or the surviving or acquiring entity) or (D) a liquidation, dissolution or winding up of this corporation; provided, however, that a transaction shall not constitute a Liquidation Event if its sole purpose is to change the state of this corporation’s incorporation or to create a holding company that will have substantially similar series and classes of shares with the same terms as existed immediately prior to such transaction and be owned in substantially the same proportions by the persons who held this corporation’s securities immediately prior to such transaction. Notwithstanding the prior sentence, neither the sale of shares of Series C Preferred Stock in a financing transaction nor the conversion of outstanding debt into shares of Series C-1 Preferred Stock shall be deemed a “Liquidation Event.”

          (ii) In any Liquidation Event, if Proceeds received by this corporation or its stockholders are other than cash, its value will be deemed its fair market value. Any securities shall be valued as follows:

               (A) Securities not subject to investment letter or other similar restrictions on free marketability covered by (B) below:

                         (1) If traded on a securities exchange or through the Nasdaq National Market, the value shall be deemed to be the average of the closing prices of the securities on such exchange or system over the twenty (20) trading-day period ending three (3) trading days prior to the closing of the Liquidation Event;

                         (2) If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the twenty(20) trading-day period ending three (3) trading days prior to the closing of the Liquidation Event; and

5

                         (3) If there is no active public market, the value shall be the fair market value thereof, as mutually determined by this corporation and the holders of a majority of the voting power of all then outstanding shares of Preferred Stock (voting together as a single class and not as separate series, and on an as-converted basis).

                  (B) The method of valuation of securities subject to investment letter or other restrictions on free marketability (other than restrictions arising solely by virtue of a stockholder’s status as an affiliate or former affiliate) shall be to make an appropriate discount from the market value determined as above in (A)(1), (2) or (3) to reflect the approximate fair market value thereof, as mutually determined by this corporation and (1) the holders of a majority of the then outstanding shares of Series C Preferred Stock, voting as a separate class, and (2) the holders of a majority of the voting power of all then outstanding shares of such Preferred Stock (voting together as a single class and not as separate series, and on an as-converted basis).

                  (C) The foregoing methods for valuing non-cash consideration to be distributed in connection with a Liquidation Event may be superceded by any determination of such value set forth in the definitive agreements governing such Liquidation Event (to which the holders of at least a majority of the then outstanding shares of Series C Preferred Stock must be parties).

          (iii) In the event the requirements of this Section 2 are not complied with, this corporation shall forthwith either:

                  (A) cause the closing of such Liquidation Event to be postponed until such time as the requirements of this Section 2 have been complied with; or

                  (B) cancel such transaction, in which event the rights, preferences and privileges of the holders of the Preferred Stock shall revert to and be the same as such rights, preferences and privileges existing immediately prior to the date of the first notice referred to in subsection 2(f)(iv) hereof.

          (iv) This corporation shall give each holder of record of Preferred Stock written notice of such impending Liquidation Event not later than twenty (20) days prior to the stockholders’ meeting called to approve such transaction, or twenty (20) days prior to the closing of such transaction, whichever is earlier, and shall also notify such holders in writing of the final approval of such transaction. The first of such notices shall describe the material terms and conditions of the impending transaction and the provisions of this Section 2, and this corporation shall thereafter give such holders prompt notice of any material changes. The transaction shall in no event take place sooner than twenty (20) days after this corporation has given the first notice provided for herein or sooner than ten (10) days after this corporation has given notice of any material changes provided for herein; provided, however, that subject to compliance with the Delaware General Corporation Law, such periods may be shortened or waived upon the written consent of the holders of Preferred Stock that represent a majority of the voting power of all then outstanding shares of such Preferred Stock (voting together as a single class and not as separate series, and on an as-converted basis).

6

     3. Redemption. The Preferred Stock is not redeemable at the option of the holder thereof.

     4. Conversion. The holders of the Preferred Stock shall have conversion rights as follows (the “Conversion Rights”):

     (a) Right to Convert. Each share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series C-1 Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share, at the office of this corporation or any transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Series A Original Issue Price, Series B Original Issue Price, Series C Original Issue Price, and Series C-1 Original Issue Price (plus all declared but unpaid dividends on each such share), as the case may be, by the applicable Conversion Price for such series (the conversion rate for a series of Preferred Stock into Common Stock is referred to herein as the “Conversion Rate” for such series), determined as hereafter provided, in effect on the date the certificate is surrendered for conversion. The Conversion Price per share as of January 28, 2004 for the Series C Preferred Stock and Series C-1 Preferred Stock shall be the Original Issue Price applicable to such series. The Conversion Price per share as of January 28, 2004 for the Series A Preferred Stock shall be $0.898 and the Conversion Price per share as of January 28, 2004 for the Series B Preferred Stock shall be $2.6571; provided, however, that the Conversion Price for the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series C-1 Preferred Stock shall be subject to adjustment as set forth in subsection 4(d).

     (b) Automatic Conversion.

          (i) Each share of Series C Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Rate at the time in effect for such series of Preferred Stock immediately upon the earlier of (i) this corporation’s sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement on Form S-1 or Form SB-2 under the Securities Act of 1933, as amended, the public offering price of which was not less than $7.86 per share (as adjusted for any stock splits, stock dividends, combinations, subdivisions, recapitalizations or the like) which results in gross proceeds to the corporation of at least $20,000,000 in the aggregate after deducting underwriting commission and expenses (a “Qualified Public Offering”) and (ii) the date specified by written consent or agreement of the holders of a majority of the then outstanding shares of Series C Preferred Stock not held by MPM Capital or any of its affiliates or their respective transferees (voting together as a single class, and on an as-converted basis) (as adjusted for any stock splits, stock dividends, combinations, subdivisions, recapitalizations or the like with respect to such series of Preferred Stock).

          (ii) Each share of Series A Preferred Stock, Series B Preferred Stock and Series C-1 Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Rate at the time in effect for such series of Preferred Stock immediately upon the earlier of (i) this corporation’s sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement on Form S-1 or Form SB-2 under the Securities Act of 1933, as amended, the public offering price of which was not less than $7.86

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per share (as adjusted for any stock splits, stock dividends, combinations, subdivisions, recapitalizations or the like) which results in gross proceeds to the corporation of at least $20,000,000 in the aggregate after deducting underwriting commission and expenses (a “Qualified Public Offering”) and (ii) the date specified by written consent or agreement of the holders of a majority of the then outstanding shares of Series A Preferred Stock, Series B Preferred Stock and Series C-1 Preferred Stock (voting together as a single class and not as separate series, and on an as-converted basis).

     (c) Mechanics of Conversion. Before any holder of Preferred Stock shall be entitled to voluntarily convert the same into shares of Common Stock, he or she shall surrender the certificate or certificates therefor, duly endorsed, at the office of this corporation or of any transfer agent for the Preferred Stock, and shall give written notice to this corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. This corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offering of securities registered pursuant to the Securities Act of 1933, as amended, the conversion may, at the option of any holder tendering Preferred Stock for conversion, be conditioned upon the closing with the underwriters of the sale of securities pursuant to such offering, in which event the persons entitled to receive the Common Stock upon conversion of the Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such sale of securities. If the conversion is in connection with the automatic conversion provisions of subsection 4(b)(I)(ii) or subsection 4(b)(II)(ii) above, such conversion shall be deemed to have been made on the conversion date described in the stockholder consent approving such conversion, and the persons entitled to receive shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holders of such shares of Common Stock as of such date.

     (d) Conversion Price Adjustments of Preferred Stock for Certain Dilutive Issuances, Splits and Combinations. The Conversion Price of the Preferred Stock shall be subject to adjustment from time to time as follows:

          (i) (A) If this corporation shall issue, on or after January 28, 2004, any Additional Stock (as defined below) without consideration or for a consideration per share less than the Conversion Price applicable to a series of Preferred Stock in effect immediately prior to the issuance of such Additional Stock, the Conversion Price for such series in effect immediately prior to each such issuance shall forthwith (except as otherwise provided in this clause (i)) be adjusted to a price determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock Outstanding (as defined below) immediately prior to such issuance plus the number of shares of Common Stock that the aggregate consideration received by this corporation for such issuance would purchase at such Conversion Price; and the denominator of which shall be number of shares of Common Stock

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Outstanding (as defined below) immediately prior to such issuance plus the number of shares of such Additional Stock. For purposes of this Section 4(d)(i)(A), the term “Common Stock Outstanding” shall mean and include the following: (1) outstanding Common Stock, (2) Common Stock issuable upon conversion of outstanding Preferred Stock, (3) Common Stock issuable upon exercise of outstanding stock options and (4) Common Stock issuable upon exercise (and, in the case of warrants to purchase Preferred Stock, conversion) of outstanding warrants. Shares described in (1) through (4) above shall be included whether vested or unvested, whether contingent or non-contingent and whether exercisable or not yet exercisable.

                  (B) No adjustment of the Conversion Price for the Preferred Stock shall be made in an amount less than one cent per share, provided that any adjustments that are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to three (3) years from the date of the event giving rise to the adjustment being carried forward, or shall be made at the end of three (3) years from the date of the event giving rise to the adjustment being carried forward. Except to the limited extent provided for in subsections (E)(3) and (E)(4), no adjustment of such Conversion Price pursuant to this subsection 4(d)(i) shall have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment.

                  (C) In the case of the issuance of Additional Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by this corporation for any underwriting or otherwise in connection with the issuance and sale thereof.

                  (D) In the case of the issuance of the Additional Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair market value thereof as determined by the Board of Directors irrespective of any accounting treatment.

                  (E) In the case of the issuance of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions shall apply for purposes of determining the number of shares of Additional Stock issued and the consideration paid therefor.

                           (1) The aggregate maximum number of shares of Common Stock deliverable upon exercise (assuming the satisfaction of any conditions to exercisability, including without limitation, the passage of time, but without taking into account potential antidilution adjustments) of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subsections 4(d)(i)(C) and (d)(i)(D)), if any, received by this corporation upon the issuance of such options or rights plus the minimum exercise price provided in such options or rights (without taking into account potential antidilution adjustments) for the Common Stock covered thereby.

                           (2) The aggregate maximum number of shares of Common Stock deliverable upon conversion of, or in exchange (assuming the satisfaction of any

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conditions to convertibility or exchangeability, including, without limitation, the passage of time, but without taking into account potential antidilution adjustments) for, any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by this corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by this corporation (without taking into account potential antidilution adjustments) upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in subsections 4(d)(i)(C) and (d)(i)(D)).

                           (3) In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to this corporation upon exercise of such options or rights or upon conversion of or in exchange for such convertible or exchangeable securities, the Conversion Price of the Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities.

                           (4) Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price of the Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities or options or rights related to such securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and convertible or exchangeable securities that remain in effect) actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities.

                           (5) The number of shares of Additional Stock deemed issued and the consideration deemed paid therefor pursuant to subsections 4(d)(i)(E)(1) and (2) shall be appropriately adjusted to reflect any change, termination or expiration of the type described in either subsection 4(d)(i)(E)(3) or (4).

          (ii) “Additional Stock” shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to subsection 4(d)(i)(E)) by this corporation on or after January 28, 2004 other than:

                  (A) Common Stock issued pursuant to a transaction described in subsection 4(d)(iii) hereof;

                  (B) Common Stock issued to employees, directors, consultants and other service providers for the primary purpose of soliciting or retaining their services pursuant to plans or agreements approved by this corporation’s Board of Directors;

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                  (C) Common Stock issued pursuant to a Qualified Public Offering;

                  (D) Common Stock issued pursuant to the conversion or exercise of convertible or exercisable securities outstanding on January 28, 2004;

                  (E) Common Stock issued in connection with a bona fide business acquisition by this corporation, whether by merger, consolidation, sale of assets, sale or exchange of stock or otherwise;

                  (F) Common Stock issued or deemed issued pursuant to subsection 4(d)(i)(E) as a result of a decrease in the Conversion Price of any series of Preferred Stock resulting from the operation of Section 4(d);

                  (G) the issuance of shares of Series C Preferred Stock and Series C-1 Preferred Stock (and the Common Stock issuable upon conversion thereof) and/or warrants to purchase shares of Series C Preferred Stock pursuant to that certain Series C and Series C-1 Preferred Stock and Warrant Purchase Agreement entered into by the corporation and certain third parties as of January 28, 2004, a copy of which will be provided to each stockholder of the corporation upon written request therefor;

                  (H) the issuance of shares of Series C-1 Preferred Stock (and the Common Stock issuable upon conversion thereof) pursuant to warrants outstanding on January 28, 2004 which by their terms will convert into warrants to purchase shares of Series C-1 Preferred Stock; or

                  (I) the issuance of warrants to purchase up to an aggregate of 200,000 shares of Series C-1 Preferred Stock with a per share exercise price equal to at least the fair market value as of the date of issue, as determined in good faith by the corporation’s Board of Directors (“Permitted Financing Warrants”) (and the Common Stock issuable upon exercise thereof) in connection with the incurrence of indebtedness for money borrowed up to an aggregate of $5,000,000 from recognized commercial lending institutions (“Permitted Debt Financing”).

          (iii) In the event this corporation should at any time or from time to time after January 28, 2004 fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as “Common Stock Equivalents”) without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price of the Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such

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increase of the aggregate of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents.

          (iv) If the number of shares of Common Stock outstanding at any time after January 28, 2004 is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price for the Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in outstanding shares.

     (e) Other Distributions. In the event this corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by this corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in subsection 4(d)(iii), then, in each such case for the purpose of this subsection 4(e), the holders of the Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of this corporation into which their shares of Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of this corporation entitled to receive such distribution.

     (f) Recapitalization. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Section 4 or in Section 2) provision shall be made so that the holders of the Preferred Stock shall thereafter be entitled to receive upon conversion of the Preferred Stock the number of shares of stock or other securities or property of this corporation or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 4 with respect to the rights of the holders of the Preferred Stock after the recapitalization to the end that the provisions of this Section 4 (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of the Preferred Stock) shall be applicable after that event as nearly equivalently as may be practicable.

     (g) No Impairment. This corporation will not, without the appropriate vote of the stockholders under the Delaware General Corporation Law or Section 6 of this Article IV(B), by amendment of its Certificate of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by this corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Preferred Stock against impairment.

     (h) No Fractional Shares and Certificate as to Adjustments.

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          (i) No fractional shares shall be issued upon the conversion of any share or shares of the Preferred Stock and the aggregate number of shares of Common Stock to be issued to particular stockholders, shall be rounded down to the nearest whole share and the corporation shall pay in cash the fair market value of any fractional shares as of the time when entitlement to receive such fractions is determined. Whether or not fractional shares would be issuable upon such conversion shall be determined on the basis of the total number of shares of Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such conversion.

          (ii) Upon the occurrence of each adjustment or readjustment of the Conversion Price of Preferred Stock pursuant to this Section 4, this corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. This corporation shall, upon the written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (A) such adjustment and readjustment, (B) the Conversion Price for such series of Preferred Stock at the time in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property that at the time would be received upon the conversion of a share of Preferred Stock.

     (i) Notices of Record Date. In the event of any taking by this corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, this corporation shall mail to each holder of Preferred Stock, at least ten (10) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend or distribution, and the amount and character of such dividend or distribution.

     (j) Reservation of Stock Issuable Upon Conversion. This corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Preferred Stock, in addition to such other remedies as shall be available to the holder of such Preferred Stock, this corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to this Certificate.

     (k) Notices. Any notice required by the provisions of this Section 4 to be given to the holders of shares of Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at his address appearing on the books of this corporation.

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     (l) Waiver of Adjustment to Conversion Price. Notwithstanding anything herein to the contrary, any downward adjustment of the Conversion Price of any series of Preferred Stock may be waived, either prospectively or retroactively and either generally or in a particular instance, by the consent or vote of the holders of a majority of the outstanding shares of such series of Preferred Stock. Any such waiver shall bind all future holders of shares of such series of Preferred Stock.

     (m) Pay-to-Play; Special Mandatory Conversion.

          (i) At any time following January 28, 2004, if (a) the holders of shares of Preferred Stock, including each such holder’s affiliates (collectively, the “Pay-to-Play Holders”), are entitled to exercise the right of first offer (the “Right of First Offer”) set forth in Section 2.4 of the Investors’ Rights Agreement, dated as of January 28, 2004, by and among this corporation and certain stockholders, as amended from time to time (the “Rights Agreement”) (a copy of which will be provided to each stockholder of the corporation upon written request therefor), with respect to an equity financing of this corporation in which this corporation issues equity securities at a price per share that is equal to or less than the then-applicable Conversion Price of the Series C Preferred Stock or Series C-1 Preferred Stock (the “Pay-to-Play Financing”), (b) this corporation has complied with its notice obligations, or such obligations have been waived, under the Right of First Offer with respect to such Pay-to-Play Financing, and this corporation thereafter proceeds to consummate the Pay-to-Play Financing, and (c) a Pay-to-Play Holder (a “Non-Participating Holder”) does not purchase at least his, her or its Pro Rata Share (as defined below) offered in such Pay-to-Play Financing (a “Mandatory Offering”), then all of such Non-Participating Holder’s shares of Preferred Stock shall automatically and without further action on the part of such Non-Participating Holder be converted (a “Special Mandatory Conversion”), using the applicable Conversion Rate in effect for each series of Preferred Stock immediately prior to the initial closing of the Pay-to-Play Financing, effective upon, subject to, and concurrently with, the consummation of the Mandatory Offering (the “Mandatory Offering Date”) into such number of shares of Common Stock; provided, however, that no such conversion shall occur in connection with a particular Pay-to-Play Financing if, pursuant to the written request of the corporation, which request must have been previously approved in writing by the holders of not less than 85% of the outstanding shares of Series C Preferred Stock, such holder agrees in writing to waive their Rights of First Offer with respect to such Pay-to-Play Financing. For purposes of this subsection 4(m)(i), each Pay-to-Play Holder’s “Pro Rata Share” shall be equal to the product of the aggregate dollar amount of equity securities offered in the Mandatory Offering times the fraction obtained by dividing (A) the sum of the total aggregate liquidation preference (as calculated pursuant to Section 2 of this Article IV(B)) for all of the shares of Preferred Stock then held by such Pay-to-Play Holder by (B) the sum of the total aggregate liquidation preference (as calculated pursuant to Section 2 of this Article IV(B)) of all then outstanding shares of Preferred Stock (such fraction, the “Pro Rata Fraction”); provided, however, in no event shall the Pay-to-Play Holders be required to purchase more than an aggregate of $6,000,000 worth of equity securities in a Mandatory Offering and in the event that the aggregate Pro Rata Share of the Pay-to-Play Holders would otherwise equal more than $6,000,000, the aggregate Pro Rata Share shall be deemed to be $6,000,000 for purposes of the calculation of a Pay-to-Play Holder’s Pro Rata Share under this subsection 4(m)(i); provided further, however, in the event that a Pay-to-Play Holder’s Pro Rata Share of the equity securities in a Mandatory Offering exceeds the amount of equity securities available to such Pay-to-Play

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Holder for purchase in a Mandatory Offering (such amount the “Mandatory Offering Amount”) as a result of the exercise by other Pay-to-Play Holders of the Right of First Offer set forth in the Rights Agreement, the failure of such Pay-to-Play Holder to purchase its full Pro-Rata Share shall not result in such Pay-to-Play Holder being deemed a Non-Participating Holder or in the Special Mandatory Conversion of such Pay-to-Play Holder’s shares of Preferred Stock as long as such Pay-to-Play Holder purchases its entire Mandatory Offering Amount. Upon a Special Mandatory Conversion pursuant to this subsection 4(m)(i), the shares of Preferred Stock so converted shall be cancelled and not subject to reissuance. Notwithstanding anything to the contrary in the Certificate, a Pay-to-Play Financing shall not be subject to the protective provisions set forth in Article IV, Section (B)(6) of the Certificate; and

          (ii) The holder of any shares of Preferred Stock converted pursuant to this subsection 4(m) shall deliver to this corporation during regular business hours at the office of any transfer agent of this corporation for the Preferred Stock, or at such other place as may be designated by this corporation, the certificate or certificates for the shares so converted, duly endorsed or assigned in blank or to this corporation. As promptly as practicable thereafter, this corporation shall issue and deliver to such holder, at the place designated by such holder, a certificate or certificates for the number of full shares of the Common Stock to be issued and such holder shall be deemed to have become a stockholder of record of Common Stock on the Mandatory Offering Date unless the transfer books of this corporation are closed on that date, in which event he, she or it shall be deemed to have become a stockholder of record of Common Stock on the next succeeding date on which the transfer books are open.

     5. Voting Rights

     (a) General Voting Rights. The holder of each share of Preferred Stock shall have the right to one vote for each share of Common Stock into which such Preferred Stock could then be converted, and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled, notwithstanding any provision hereof, to notice of any stockholders’ meeting in accordance with the Bylaws of this corporation, and except as provided in subsection 5(b) below with respect to the election of directors by the separate class vote of the holders of Common Stock or as required under the Delaware General Corporation Law, shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. Fractional votes shall not, however, be permitted and any fractional voting rights available on an as-converted basis (after aggregating all shares into which shares of Preferred Stock held by each holder could be converted) shall be rounded to the nearest whole number (with one-half being rounded upward).

     (b) Voting for the Election of Directors. As long as any shares of Series A Preferred Stock are outstanding, the holders of such shares of Series A Preferred Stock shall be entitled to elect one (1) director of this corporation at any election of directors. As long as any shares of Series B Preferred Stock are outstanding, the holders of such shares of Series B Preferred Stock shall be entitled to elect one (1) director of this corporation at any election of directors. As long as any shares of Series C Preferred Stock or Series C-1 Preferred Stock are outstanding, the holders of such shares of Series C Preferred Stock and Series C-1 Preferred Stock (voting together as a single class and not as separate series) shall initially be entitled to

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elect two (2) directors of this corporation at any election of directors. The holders of outstanding Common Stock shall be entitled to elect one (1) director of this corporation at any election of directors. The holders of Common Stock and Series A Preferred Stock (voting together as a single class and not as separate series, and on an as-converted basis) shall be entitled to elect one (1) director of this corporation at any election of directors. The holders of Preferred Stock (voting together as a single class and not as separate series, and on an as-converted basis) shall be entitled to elect one (1) director of this corporation at any election of directors.

     Upon the vote of a majority of the then outstanding shares of Series C Preferred Stock and Series C-1 Preferred Stock (voting together as a single class and not as separate series), the holders of such shares of Series C Preferred Stock and Series C-1 Preferred Stock shall be entitled to elect an additional two (2) directors of this corporation at any election of directors.

     Any vacancy, including newly created directorships resulting from any increase in the authorized number of directors or amendment of the Certificate, and vacancies created by removal or resignation of a director, may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next annual election and until their successors are duly elected and shall qualify, unless sooner displaced; provided, however, that where such vacancy occurs among the directors elected by the holders of a class or series of stock, the holders of shares of such class or series may override the Board of Directors’ action to fill such vacancy by (i) voting for their own designee to fill such vacancy at a meeting of the Company’s stockholders or (ii) written consent, if the consenting stockholders hold a sufficient number of shares to elect their designee at a meeting of the stockholders. Any director may be removed during his or her term of office, either with or without cause, by, and only by, the affirmative vote of the holders of the shares of the class or series of stock entitled to elect such director or directors, given either at a special meeting of such stockholders duly called for that purpose or pursuant to a written consent of stockholders, and any vacancy thereby created may be filled by the holders of that class or series of stock represented at the meeting or pursuant to written consent.

     6. Protective Provisions

     (a) Subject to the provisions of Article IV, Section (B)(4)(m)(i), of this Certificate, so long as at least 1,200,000 shares of Series C Preferred Stock remain outstanding (as adjusted for any stock splits, stock dividends, combinations, subdivisions, recapitalizations or the like), this corporation shall not (by amendment, merger, consolidation or otherwise) without first obtaining the approval (by vote or written consent, as provided by law) of the holders of a majority of the then outstanding shares of Series C Preferred Stock not held by MPM Capital or any of its affiliates or their respective transferees (as adjusted for any stock splits, stock dividends, combinations, subdivisions, recapitalizations or the like with respect to such series of Preferred Stock):

          (i) consummate a Liquidation Event;

          (ii) alter, amend or change this corporation’s Certificate of Incorporation (whether by merger, reorganization, consolidation or otherwise);

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          (iii) alter, amend or change this corporation’s Bylaws in a manner that adversely affects holders of the Series C Preferred Stock;

          (iv) change (other than by conversion pursuant to Section 4 hereof) the total number of authorized shares of Preferred Stock or designate or issue any additional shares of Preferred Stock;

          (v) authorize, designate or issue, or obligate itself to issue, any equity security (including any other security convertible into or exercisable for any such equity security) having a preference over, or being on a parity with, the Series C Preferred Stock with respect to dividends, liquidation or redemption, other than the issuance of any authorized but unissued shares of Series C Preferred Stock designated in this Certificate (including any security convertible into or exercisable for such shares of Series C Preferred Stock);

          (vi) designate any of the available undesignated shares of the corporation to create a class or series of stock having a preference over, or being on a parity with, the Series C Preferred Stock with respect to dividends, liquidation or redemption;

          (vii) declare or pay any dividend on, or make any other distribution with respect to, any shares of capital stock at any time created and issued ranking junior to the Series C Preferred Stock with respect to dividends, liquidation or redemption;

          (viii) redeem, purchase or otherwise acquire (or pay into or set aside for a sinking fund for such purpose) any share or shares of Preferred Stock or Common Stock; provided, however, that this restriction shall not apply to the repurchase of shares of Common Stock from employees, officers, directors, consultants or other persons performing services for this corporation or any subsidiary pursuant to agreements under which this corporation has the option to repurchase such shares upon the occurrence of certain events, such as the termination of employment or service, or pursuant to a right of first refusal;

          (ix) acquire any other company or business (whether by purchase of assets, merger or otherwise);

          (x) change the nature of the corporation’s business;

          (xi) incur indebtedness for money borrowed exceeding $5,000,000 in the aggregate from recognized commercial lending institutions; or

          (xii) cause or permit any subsidiary to do any of the foregoing.

     (b) Subject to the provisions of Article IV, Section (B)(4)(m)(i), of this Certificate, so long as at least 1,500,000 shares of Series A Preferred Stock, Series B Preferred Stock and/or Series C-1 Preferred Stock remain outstanding (as adjusted for any stock splits, stock dividends, combinations, subdivisions, recapitalizations or the like), this corporation shall not (by amendment, merger, consolidation or otherwise) without first obtaining the approval (by vote or written consent, as provided by law) of the holders of a majority of the then outstanding shares of Series A Preferred Stock, Series B Preferred Stock and Series C-1 Preferred Stock (voting together as a single class and not as separate series and on an as-converted basis):

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          (i) consummate a Liquidation Event at any time prior to July 28, 2005;

          (ii) alter, amend or change this corporation’s Bylaws in a manner that adversely affects holders of the Series C-1 Preferred Stock, Series B Preferred Stock or Series A Preferred Stock;

          (iii) alter or change the rights, preferences or privileges of the shares of Series C-1 Preferred Stock, whether by amendment of this corporation’s Certificate of Incorporation or otherwise, so as to affect adversely the shares of Series A Preferred Stock, Series B Preferred Stock or Series C-1 Preferred Stock;

          (iv) change (other than by conversion pursuant to Section 4 hereof) the total number of authorized shares of Preferred Stock or designate or issue any additional shares of Preferred Stock;

          (v) authorize, designate or issue, or obligate itself to issue, any equity security (including any other security convertible into or exercisable for any such equity security) having a preference over, or being on a parity with, the Series A Preferred Stock, Series B Preferred Stock or Series C-1 Preferred Stock with respect to dividends, liquidation or redemption, other than the issuance of any authorized but unissued shares of Series C Preferred Stock or Series C-1 Preferred Stock designated in this Certificate (including any security convertible into or exercisable for such shares of Series C Preferred Stock or Series C-1 Preferred Stock);

          (vi) designate any of the available undesignated shares of the corporation to create a class or series of stock having a preference over, or being on a parity with, the Series A Preferred Stock, Series B Preferred Stock or Series C-1 Preferred Stock with respect to dividends, liquidation or redemption;

          (vii) declare or pay any dividend on, or make any other distribution with respect to, any shares of capital stock at any time created and issued ranking junior to the Series A Preferred Stock, Series B Preferred Stock or Series C-1 Preferred Stock with respect to dividends, liquidation or redemption;

          (viii) redeem, purchase or otherwise acquire (or pay into or set aside for a sinking fund for such purpose) any share or shares of Preferred Stock or Common Stock; provided, however, that this restriction shall not apply to the repurchase of shares of Common Stock from employees, officers, directors, consultants or other persons performing services for this corporation or any subsidiary pursuant to agreements under which this corporation has the option to repurchase such shares upon the occurrence of certain events, such as the termination of employment or service, or pursuant to a right of first refusal;

          (ix) acquire any other company or business (whether by purchase of assets, merger or otherwise);

          (x) change the nature of the corporation’s business;

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          (xi) incur indebtedness for money borrowed exceeding $5,000,000 in the aggregate from recognized commercial lending institutions; or

          (xii) cause or permit any subsidiary to do any of the foregoing.

     7. Status of Converted Stock. In the event any shares of Preferred Stock shall be converted pursuant to Section 4 hereof, the shares so converted shall be cancelled and shall not be issuable by this corporation. The Certificate of Incorporation of this corporation shall be appropriately amended to effect the corresponding reduction in this corporation’s authorized capital stock.

     C. Common Stock. The rights, preferences, privileges and restrictions granted to and imposed on the Common Stock are as set forth below in this Article IV(C).

     1. Dividend Rights. Subject to the prior rights of holders of all classes of stock at the time outstanding having prior rights as to dividends, the holders of the Common Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of any assets of this corporation legally available therefor, any dividends as may be declared from time to time by the Board of Directors.

     2. Liquidation Rights. Upon the liquidation, dissolution or winding up of this corporation, the assets of this corporation shall be distributed as provided in Section 2 of Article IV(B) hereof.

     3. Redemption. The Common Stock is not redeemable at the option of the holder.

     4. Voting Rights. The holder of each share of Common Stock shall have the right to one vote for each such share, and shall be entitled to notice of any stockholders’ meeting in accordance with the Bylaws of this corporation, and shall be entitled to vote upon such matters and in such manner as may be provided by law.

ARTICLE V

     Except as otherwise provided in this Certificate, in furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, repeal, alter, amend, and rescind any or all of the Bylaws of this corporation.

ARTICLE VI

The number of directors of this corporation shall be determined in the manner set forth in the Bylaws of this corporation and the Rights Agreement. Elections of directors need not be by written ballot unless the Bylaws of the corporation shall so provide.

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ARTICLE VII

     To the fullest extent permitted by the Delaware General Corporation Law as the same exists or may hereafter be amended, a director of this corporation shall not be liable to this corporation or its stockholders for monetary damages for breach of fiduciary duty as a director.

     Any repeal or modification of the foregoing provisions of this Article VII by the stockholders of this corporation shall not adversely affect any right or protection of a director of this corporation existing at the time of, or increase the liability of any director of this corporation with respect to any acts or omissions of such director occurring prior to, such repeal or modification.

ARTICLE VIII

     This corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation.

     IN WITNESS WHEREOF, the undersigned has caused this Amended and Restated Certificate of Incorporation to be executed by its duly authorized officer as of this 22^nd day of March, 2005.

RESTORE MEDICAL, INC.
By:	/s/ Susan L. Critzer
Name: Susan L. Critzer
Title: President

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EX-3.3

Exhibit 3.3

BYLAWS
OF
RESTORE MEDICAL, INC.

ARTICLE I.

OFFICES, CORPORATE SEAL

          Section 1.01. Registered Office. The registered office of the corporation in Delaware shall be that set forth in the certificate of incorporation or in the most recent amendment of the certificate of incorporation or resolution of the directors filed with the secretary of state of Delaware changing the registered office.

          Section 1.02. Other Offices. The corporation may have such other offices, within or without the state of Delaware, as the directors shall, from time to time, determine.

          Section 1.03. Corporate Seal. The corporation shall have no seal.

ARTICLE II.

MEETINGS OF SHAREHOLDERS

          Section 2.01. Place and Time of Meetings. Except as provided otherwise by the Delaware General Corporation Law, meetings of the shareholders may be held at any place, within or without the state of Delaware, as may from time to time be designated by the directors and, in the absence of such designation, shall be held at the principal executive offices of the corporation in the state of Minnesota. The directors shall designate the time of day for each meeting and, in the absence of such designation, every meeting of shareholders shall be held at ten o’clock a.m.

          Section 2.02. Regular Meetings.

          (a) A regular meeting of the shareholders shall be held on such date as the board of directors shall by resolution establish.

          (b) At a regular meeting the shareholders, voting as provided in the articles of incorporation and these bylaws, shall designate the number of directors to constitute the board of directors (subject to the authority of the board of directors thereafter to increase or decrease the number of directors as permitted by law), shall elect qualified successors for directors who serve for an indefinite term or whose terms have expired or are due to expire within six months after the date of the meeting and shall transact such other business as may properly come before them.

          Section 2.03. Special Meetings. Special meetings of the shareholders may be held at any time and for any purpose and may be called by the chief executive officer, the chief financial officer, two or more directors or by a shareholder or shareholders holding 10% or more of the voting power of all shares entitled to vote, except that a special meeting for the purpose of considering any action to directly or indirectly facilitate or affect a business combination,

including any action to change or otherwise affect the composition of the board of directors for that purpose, must be called by 25% or more of the voting power of all shares entitled to vote. A shareholder or shareholders holding the requisite percentage of the voting power of all shares entitled to vote may demand a special meeting of the shareholders by written notice of demand given to the chief executive officer or chief financial officer of the corporation and containing the purposes of the meeting. Within 30 days after receipt of demand by one of those officers, the board of directors shall cause a special meeting of shareholders to be called and held on notice no later than 90 days after receipt of the demand, at the expense of the corporation. Special meetings shall be held on the date and at the time and place fixed by the chief executive officer or the board of directors, except that a special meeting called by or at demand of a shareholder or shareholders shall be held in the county where the principal executive office is located. The business transacted at a special meeting shall be limited to the purposes as stated in the notice of the meeting.

          Section 2.04. Quorum, Adjourned Meetings. The holders of a majority of the shares entitled to vote shall constitute a quorum for the transaction of business at any regular or special meeting. In case a quorum shall not be present at a meeting, the meeting may be adjourned from time to time without notice other than announcement at the time of adjournment of the date, time and place of the adjourned meeting. If a quorum is present, a meeting may be adjourned from time to time without notice other than announcement at the time of adjournment of the date, time and place of the adjourned meeting. At adjourned meetings at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally noticed. If a quorum is present when a meeting is convened, the shareholders present may continue to transact business until adjournment notwithstanding the withdrawal of enough shareholders originally present to leave less than a quorum.

          Section 2.05. Voting. At each meeting of the shareholders every shareholder having the right to vote shall be entitled to vote either in person or by proxy. Each shareholder, unless the articles of incorporation or statutes provide otherwise, shall have one vote for each share having voting power registered in such shareholder’s name on the books of the corporation. Jointly owned shares may be voted by any joint owner unless the corporation receives written notice from any one of them denying the authority of that person to vote those shares. Upon the demand of any shareholder, the vote upon any question before the meeting shall be by ballot. All questions shall be decided by a majority vote of the number of shares entitled to vote and represented at the meeting at the time of the vote except if otherwise required by statute, the articles of incorporation, or these bylaws.

          Section 2.06. Record Date. The board of directors may fix a date, not exceeding 60 days preceding the date of any meeting of shareholders, as a record date for the determination of the shareholders entitled to notice of, and to vote at, such meeting, notwithstanding any transfer of shares on the books of the corporation after any record date so fixed. If the board of directors fails to fix a record date for determination of the shareholders entitled to notice of, and to vote at, any meeting of shareholders, the record date shall be the 20th day preceding the date of such meeting.

          Section 2.07. Notice of Meetings. There shall be mailed to each shareholder, shown by the books of the corporation to be a holder of record of voting shares, at his address as

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shown by the books of the corporation, a notice setting out the time and place of each regular meeting and each special meeting, except (unless otherwise provided in section 2.04 hereof) where the meeting is an adjourned meeting and the date, time and place of the meeting were announced at the time of adjournment, which notice shall be mailed at least five days prior thereto (unless otherwise provided in section 2.04 hereof); except that notice of a meeting at which a plan of merger or exchange is to be considered shall be mailed to all shareholders of record, whether entitled to vote or not, at least fourteen days prior thereto. Every notice of any special meeting called pursuant to section 2.03 hereof shall state the purpose or purposes for which the meeting has been called, and the business transacted at all special meetings shall be confined to the purposes stated in the notice. The written notice of any meeting at which a plan of merger or exchange is to be considered shall so state such as a purpose of the meeting. A copy or short description of the plan of merger or exchange shall be included in or enclosed with such notice.

          Section 2.08. Waiver of Notice. Notice of any regular or special meeting may be waived by any shareholder either before, at or after such meeting orally or in writing signed by such shareholder or a representative entitled to vote the shares of such shareholder. A shareholder, by his attendance at any meeting of shareholders, shall be deemed to have waived notice of such meeting, except where the shareholder objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened, or objects before a vote on an item of business because the item may not lawfully be considered at that meeting and does not participate in the consideration of the item at that meeting.

          Section 2.09. Written Action. Any action which might be taken at a meeting of the shareholders may be taken without a meeting if done in writing and signed by all of the shareholders entitled to vote on that action.

ARTICLE III.

DIRECTORS

          Section 3.01. General Powers. The business and affairs of the corporation shall be managed by or under the authority of the board of directors, except as otherwise permitted by statute.

          Section 3.02. Number, Qualification and Term of Office. The Board of Directors shall consist of at least four directors. The number of directors shall be increased or decreased from time to time by resolution of the board of directors or the shareholders. Directors need not be shareholders. Each of the directors shall hold office until the regular meeting of shareholders next held after such director’s election and until such director’s successor shall have been elected and shall qualify, or until the earlier death, resignation, removal, or disqualification of such director.

          Section 3.03. Board Meetings. Meetings of the board of directors may be held from time to time at such time and place within or without the state of Delaware as may be designated in the notice of such meeting.

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          Section 3.04. Calling Meetings; Notice. Meetings of the board of directors may be called by the chairman of the board by giving at least twenty-four hours’ notice, or by any other director by giving at least five days’ notice, of the date, time and place thereof to each director by mail, telephone, telegram or in person. If the day or date, time and place of a meeting of the board of directors has been announced at a previous meeting of the board, no notice is required. Notice of an adjourned meeting of the board of directors need not be given other than by announcement at the meeting at which adjournment is taken.

          Section 3.05. Waiver of Notice. Notice of any meeting of the board of directors may be waived by any director either before, at, or after such meeting orally or in a writing signed by such director. A director, by his attendance at any meeting of the board of directors, shall be deemed to have waived notice of such meeting, except where the director objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened and does not participate thereafter in the meeting.

          Section 3.06. Quorum. A majority of the directors holding office immediately prior to a meeting of the board of directors shall constitute a quorum for the transaction of business at such meeting.

          Section 3.07. Absent Directors. A director may give advance written consent or opposition to a proposal to be acted on at a meeting of the board of directors. If such director is not present at the meeting, consent or opposition to a proposal does not constitute presence for purposes of determining the existence of a quorum, but consent or opposition shall be counted as a vote in favor of or against the proposal and shall be entered in the minutes or other record of action at the meeting, if the proposal acted on at the meeting is substantially the same or has substantially the same effect as the proposal to which the director has consented or objected.

          Section 3.08. Conference Communications. Any or all directors may participate in any meeting of the board of directors, or of any duly constituted committee thereof, by any means of communication through which the directors may simultaneously hear each other during such meeting. For the purposes of establishing a quorum and taking any action at the meeting, such directors participating pursuant to this section 3.08 shall be deemed present in person at the meeting; and the place of the meeting shall be the place of origination of the conference telephone conversation or other comparable communication technique.

          Section 3.09. Vacancies; Newly Created Directorships. Vacancies on the board of directors of this corporation occurring by reason of death, resignation, removal or disqualification shall be filled for the unexpired term by a majority vote of the remaining directors of the board although less than a quorum; newly created directorships resulting from an increase in the authorized number of directors by action of the board of directors as permitted by section 3.02 may be filled by a majority vote of the directors serving at the time of such increase; and each director elected pursuant to this section 3.09 shall be a director until such director’s successor is elected by the shareholders at their next regular or special meeting.

          Section 3.10. Removal. Any or all of the directors may be removed from office at any time, with or without cause, by the affirmative vote of the shareholders holding a majority of the shares entitled to vote at an election of directors. A director named by the board of

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directors to fill a vacancy may be removed from office at any time, with or without cause, by the affirmative vote of the remaining directors if the shareholders have not elected directors in the interim between the time of the appointment to fill such vacancy and the time of the removal. In the event that the entire board or any one or more directors be so removed, new directors may be elected at the same meeting.

          Section 3.11. Committees. A resolution approved by the affirmative vote of a majority of the board of directors may establish committees having the authority of the board in the management of the business of the corporation to the extent provided in the resolution. A committee shall consist of one or more persons, who need not be directors, appointed by affirmative vote of a majority of the directors present. Committees are subject to the direction and control of, and vacancies in the membership thereof shall be filled by, the board of directors. A majority of the members of the committee present at a meeting is a quorum for the transaction of business, unless a larger or smaller proportion or number is provided in a resolution approved by the affirmative vote of a majority of the directors present.

          Section 3.12. Written Action. Any action which might be taken at a meeting of the board of directors, or any duly constituted committee thereof, may be taken without a meeting if done in writing and signed by all of the directors or committee members, unless the articles provide otherwise and the action need not be approved by the shareholders.

          Section 3.13. Compensation. Directors who are not salaried officers of this corporation shall receive such fixed sum per meeting attended or such fixed annual sum as shall be determined, from time to time, by resolution of the board of directors. The board of directors may, by resolution, provide that all directors shall receive their expenses, if any, of attendance at meetings of the board of directors or any committee thereof. Nothing herein contained shall be construed to preclude any director from serving this corporation in any other capacity and receiving proper compensation therefor.

ARTICLE IV.

OFFICERS

          Section 4.01. Number. The officers of the corporation shall consist of a chairman of the board (if one is elected by the board), the president, one or more vice presidents (if desired by the board), a treasurer, a secretary (if one is elected by the board) and such other officers and agents as may, from time to time, be elected by the board of directors. Any number of offices may be held by the same person.

          Section 4.02. Election, Term of Office and Qualifications. The board of directors shall elect or appoint, by resolution approved by the affirmative vote of a majority of the directors present, from within or without their number, the president, treasurer and such other officers as may be deemed advisable, each of whom shall have the powers, rights, duties, responsibilities, and terms in office provided for in these bylaws or a resolution of the board of directors not inconsistent therewith. The president and all other officers who may be directors shall continue to hold office until the election and qualification of their successors, notwithstanding an earlier termination of their directorship.

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          Section 4.03. Removal and Vacancies. Any officer may be removed from his office by the board of directors at any time, with or without cause. Such removal, however, shall be without prejudice to the contract rights of the person so removed. If there be a vacancy in an office of the corporation by reason of death, resignation or otherwise, such vacancy shall be filled for the unexpired term by the board of directors.

          Section 4.04. Chairman of the Board. The chairman of the board, if one is elected, shall preside at all meetings of the shareholders and directors and shall have such other duties as may be prescribed, from time to time, by the board of directors.

          Section 4.05. President. The president shall be the chief executive officer and shall have general active management of the business of the corporation. In the absence of the chairman of the board, he shall preside at all meetings of the shareholders and directors. He shall see that all orders and resolutions of the board of directors are carried into effect. He shall execute and deliver, in the name of the corporation, any deeds, mortgages, bonds, contracts or other instruments pertaining to the business of the corporation unless the authority to execute and deliver is required by law to be exercised by another person or is expressly delegated by the articles or bylaws or by the board of directors to some other officer or agent of the corporation. He shall maintain records of and, whenever necessary, certify all proceedings of the board of directors and the shareholders, and in general, shall perform all duties usually incident to the office of the president. He shall have such other duties as may, from time to time, be prescribed by the board of directors.

          Section 4.06. Vice President. Each vice president, if one or more is elected, shall have such powers and shall perform such duties as prescribed by the board of directors or by the president. In the event of the absence or disability of the president, the vice president(s) shall succeed to his power and duties in the order designated by the board of directors.

          Section 4.07. Secretary. The secretary, if one is elected, shall be secretary of and shall attend all meetings of the shareholders and board of directors and shall record all proceedings of such meetings in the minute book of the corporation. He shall give proper notice of meetings of shareholders and directors. He shall perform such other duties as may, from time to time, be prescribed by the board of directors or by the president.

          Section 4.08. Treasurer. The treasurer shall be the chief financial officer and shall keep accurate financial records for the corporation. He shall deposit all moneys, drafts and checks in the name of, and to the credit of, the corporation in such banks and depositories as the board of directors shall, from time to time, designate. He shall have power to endorse, for deposit, all notes, checks and drafts received by the corporation. He shall disburse the funds of the corporation, as ordered by the board of directors, making proper vouchers therefor. He shall render to the president and the directors, whenever requested, an account of all his transactions as treasurer and of the financial condition of the corporation, and shall perform such other duties as may, from time to time, be prescribed by the board of directors or by the president.

          Section 4.09. Compensation. The officers of the corporation shall receive such compensation for their services as may be determined, from time to time, by resolution of the board of directors.

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ARTICLE V.

SHARES AND THEIR TRANSFER

          Section 5.01. Certificates for Shares. All shares of the corporation shall be certificated shares. Every owner of shares of the corporation shall be entitled to a certificate, to be in such form as shall be prescribed by the board of directors, certifying the number of shares of the corporation owned by such shareholder. The certificates for such shares shall be numbered in the order in which they shall be issued and shall be signed, in the name of the corporation, by the president and by the secretary or an assistant secretary or by such officers as the board of directors may designate. If the certificate is signed by a transfer agent or registrar, such signatures of the corporate officers may be by facsimile if authorized by the board of directors. Every certificate surrendered to the corporation for exchange or transfer shall be cancelled, and no new certificate or certificates shall be issued in exchange for any existing certificate until such existing certificate shall have been so cancelled, except in cases provided for in section 5.04.

          Section 5.02. Issuance of Shares. The board of directors is authorized to cause to be issued shares of the corporation up to the full amount authorized by the articles of incorporation in such amounts as may be determined by the board of directors and as may be permitted by law. Shares may be issued for any consideration, including, without limitation, in consideration of cash or other property, tangible or intangible, received or to be received by the corporation under a written agreement, of services rendered or to be rendered to the corporation under a written agreement, or of an amount transferred from surplus to stated capital upon a share dividend. At the time of approval of the issuance of shares, the board of directors shall state, by resolution, its determination of the fair value to the corporation in monetary terms of any consideration other than cash for which shares are to be issued.

          Section 5.03. Transfer of Shares. Transfer of shares on the books of the corporation may be authorized only by the shareholder named in the certificate, or the shareholder’s legal representative, or the shareholder’s duly authorized attorney-in-fact, and upon surrender of the certificate or the certificates for such shares. The corporation may treat as the absolute owner of shares of the corporation, the person or persons in whose name shares are registered on the books of the corporation.

          Section 5.04. Loss of Certificates. Any shareholder claiming a certificate for shares to be lost, stolen, or destroyed shall make an affidavit of that fact in such form as the board of directors shall require and shall, if the board of directors so requires, give the corporation a bond of indemnity in form, in an amount, and with one or more sureties satisfactory to the board of directors, to indemnify the corporation against any claim which may be made against it on account of the reissue of such certificate, whereupon a new certificate may be issued in the same tenor and for the same number of shares as the one alleged to have been lost, stolen or destroyed.

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ARTICLE VI.

DISTRIBUTIONS, RECORD DATE

          Section 6.01. Distributions. Subject to the provisions of the articles of incorporation, of these bylaws, and of law, the board of directors may authorize and cause the corporation to make distributions whenever, and in such amounts or forms as, in its opinion, are deemed advisable.

          Section 6.02. Record Date. Subject to any provisions of the articles of incorporation, the board of directors may fix a date not exceeding 120 days preceding the date fixed for the payment of any distribution as the record date for the determination of the shareholders entitled to receive payment of the distribution and, in such case, only shareholders of record on the date so fixed shall be entitled to receive payment of such distribution notwithstanding any transfer of shares on the books of the corporation after the record date.

ARTICLE VII.

BOOKS AND RECORDS, FISCAL YEAR

          Section 7.01. Share Register. The board of directors of the corporation shall cause to be kept at its principal executive office, or at another place or places within the United States determined by the board:

(1)	a share register not more than one year old, containing the names and addresses of the shareholders and the number and classes of shares held by each shareholder; and
(2)	a record of the dates on which certificates or transaction statements representing shares were issued.

          Section 7.02. Fiscal Year. The fiscal year of the corporation shall be determined by the board of directors.

ARTICLE VIII.

LOANS, GUARANTEES, SURETYSHIP

          Section 8.01. The corporation may lend money to, guarantee an obligation of, become a surety for, or otherwise financially assist a person if the transaction, or a class of transactions to which the transaction belongs, is approved by the affirmative vote of a majority of the directors present, and:

(1)	is in the usual and regular course of business of the corporation;
(2)	is with, or for the benefit of, a related corporation, an organization in which the corporation has a financial interest, an organization with which the corporation has a business relationship, or an organization to which the corporation has the power to make donations;

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(3)	is with, or for the benefit of, an officer or other employee of the corporation or a subsidiary, including an officer or employee who is a director of the corporation or a subsidiary, and may reasonably be expected, in the judgment of the board, to benefit the corporation; or
(4)	has been approved by (a) the holders of two-thirds of the voting power of the shares entitled to vote which are owned by persons other than the interested person or persons, or (b) the unanimous affirmative vote of the holders of all outstanding shares whether or not entitled to vote.

Such loan, guarantee, surety contract or other financial assistance may be with or without interest, and may be unsecured, or may be secured in the manner as a majority of the directors present approve, including, without limitation, a pledge of or other security interest in shares of the corporation. Nothing in this section shall be deemed to deny, limit or restrict the powers of guaranty, surety or warranty of the corporation at common law or under a statute of the state of Delaware.

ARTICLE IX.

INDEMNIFICATION OF CERTAIN PERSONS

          Section 9.01. Indemnification. The corporation shall, to the fullest extent permitted by law, indemnify every person who is or was a party or is or was threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative (an “Action”), by reason of the fact that such person is or was a director or officer of the corporation or is or was serving at the request of the corporation as a director, officer, trustee, plan administrator or plan fiduciary of another corporation, partnership, limited liability company, trust, employee benefit plan or other enterprise (an “Indemnified Person”), against all expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement or other disposition that the Indemnified Person actually and reasonably incurs in connection with the Action and shall reimburse each such person for all legal fees and expenses reasonably incurred by such person in seeking to enforce its rights to indemnification under this Article (by means of legal action or otherwise).

          Section 9.02. Advancement of Expenses. Upon written request from an Indemnified Person, the corporation shall pay the expenses (including attorneys’ fees) incurred by such Indemnified Person in connection with any Action in advance of the final disposition of such Action. The corporation’s obligation to pay expenses pursuant to this Section shall be contingent upon the Indemnified Person providing the undertaking required by the Delaware General Corporation Law.

          Section 9.03. Non-Exclusivity. The rights of indemnification and advancement of expenses contained in this Article IX shall not be exclusive of any other rights to indemnification or similar protection to which any Indemnified Person may be entitled under any agreement, vote of stockholders or disinterested directors, insurance policy or otherwise.

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          Section 9.04. Heirs and Beneficiaries. The rights created by this Article IX shall inure to the benefit of each Indemnified Person and each heir, executor and administrator of such Indemnified Person.

          Section 9.05. Effect of Amendment. Neither the amendment, modification or repeal of this Article IX nor the adoption of any provision in these bylaws inconsistent with this Article IX shall adversely affect any right or protection of an Indemnified Person with respect to any act or omission that occurred prior to the time of such amendment, modification, repeal or adoption.

ARTICLE X.

AMENDMENTS

          Section 10.01. These bylaws may be amended or altered by a vote of the majority of the whole board of directors at any meeting.

ARTICLE XI.

SECURITIES OF OTHER CORPORATIONS

          Section 11.01. Voting Securities Held by the Corporation. Unless otherwise ordered by the board of directors, the president shall have full power and authority on behalf of the corporation (a) to attend any meeting of security holders of other corporations in which the corporation may hold securities and to vote such securities on behalf of this corporation; (b) to execute any proxy for such meeting on behalf of the corporation; or (c) to execute a written action in lieu of a meeting of such other corporation on behalf of this corporation. At such meeting, the president shall possess and may exercise any and all rights and powers incident to the ownership of such securities that the corporation possesses. The board of directors may, from time to time, grant such power and authority to one or more other persons and may remove such power and authority from the president or any other person or persons.

          Section 11.02. Purchase and Sale of Securities. Unless otherwise ordered by the board of directors, the president shall have full power and authority on behalf of the corporation to purchase, sell, transfer or encumber any and all securities of any other corporation owned by the corporation, and may execute and deliver such documents as may be necessary to effectuate such purchase, sale, transfer or encumbrance. The board of directors may, from time to time, confer like powers upon any other person or persons.

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EX-4.2

Exhibit 4.2

RESTORE MEDICAL, INC.

INVESTORS’ RIGHTS AGREEMENT

January 28, 2004

TABLE OF CONTENTS

	Page
1. REGISTRATION RIGHTS		1
1.1 Definitions		1
1.2 Request for Registration		2
1.3 Company Registration		4
1.4 Form S-3 Registration		6
1.5 Obligations of the Company		7
1.6 Information from Holder		8
1.7 Expenses of Registration		8
1.8 Delay of Registration		9
1.9 Indemnification		9
1.10 Reports Under the 1934 Act		12
1.11 Assignment of Registration Rights		12
1.12 Limitations on Subsequent Registration Rights		13
1.13 “Market Stand-Off’ Agreement		13
1.14 Termination of Registration Rights		14
1.15 Black-Out Period		14
2. COVENANTS OF THE COMPANY		15
2.1 Delivery of Financial Statements		15
2.2 Inspection		15
2.3 Termination of Information and Inspection Covenants		16
2.4 Right of First Offer		16
2.5 Proprietary Information and Inventions Agreements		17
2.6 Compensation and Audit Committees		18
2.7 Director and Officer Liability Insurance		18
2.8 Qualified Small Business Stock		18
3. BOARD OF DIRECTORS		18
3.1 Articles of Incorporation		18
3.2 Agreement to Vote		19
3.3 Board Size		19
3.4 Election of Directors		19
3.5 Removal; Vacancies		21
3.6 Legend		21
3.7 No Liability for Election of Recommended Directors		21
3.8 Termination of Voting Provisions		21
3.9 Board Observation Rights		21
4. DRAG-ALONG RIGHTS		22
5. LIMITED POWER OF ATTORNEY		23
6. PAY-TO-PLAY FINANCING		24

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	Page
7. REORGANIZATION OF THE COMPANY		24
8. ADDITIONAL COVENANTS		24
8.1 Required Financing		24
8.2 Consent to Pay-to-Play		25
8.3 Investors’ Rights Agreement		25
9. MISCELLANEOUS		25
9.1 Successors and Assigns		25
9.2 Governing Law		25
9.3 Counterparts		25
9.4 Titles and Subtitles		26
9.5 Notices		26
9.6 Expenses		26
9.7 Entire Agreement; Amendments and Waivers		26
9.8 Severability		27
9.9 Aggregation of Stock		27
9.10 Restrictions of Transfer		27
9.11 Massachusetts Business Trusts		28

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INVESTORS’ RIGHTS AGREEMENT

     THIS INVESTORS’ RIGHTS AGREEMENT (the “Agreement”) is made as of the 28`h day of January, 2004, by and among Restore Medical, Inc., a Minnesota corporation (the “Company”), the investors and certain other shareholders of the Company listed on Schedule A hereto, each of which is herein referred to as an “Investor,” and the holders of the Company’s capital stock listed on Schedule B hereto, each of whom is herein referred to as a “Founder”

RECITALS

     WHEREAS, the Company and certain Investors are parties to the Series C and Series C-1 Preferred Stock and Warrant Purchase Agreement of even date herewith (the “Series C/C-1 Agreement”); and

     WHEREAS, in order to induce such Investors to purchase Series C Preferred Stock and Series C-1 Preferred Stock (collectively, the “Series C Preferred”) and invest funds in the Company pursuant to the Series C/C-1 Agreement, the Investors, the Founders and the Company hereby desire to enter into this Agreement.

     NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:

     1. Registration Rights. The Company covenants and agrees as follows:

          1.1 Definitions. For purposes of this Section 1:

     (a) The term “Act” means the Securities Act of 1933, as amended.

     (b) The term “Common Stock” means the Company’s Common Stock, par value $.01 per share.

     (c) The term “Form S-3” means such form under the Act as in effect on the date hereof or any registration form under the Act subsequently adopted by the SEC that permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC.

     (d) The term “Holder” means any person owning or having the right to acquire Registrable Securities or any assignee thereof in accordance with Section 1.11 hereof.

     (e) The term “Initial Offering” means the Company’s first firm commitment underwritten public offering of its Common Stock under the Act.

     (f) The term “1934 Act” means the Securities Exchange Act of 1934, as amended.

     (g) The term “Preferred Stock” means the Company’s Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, each with a par value of $.01 per share.

     (h) The terms “register,” “registered,” and “registration” refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement or document.

     (i) The term “Registrable Securities” means (i) the Common Stock issuable or issued upon conversion of the Preferred Stock and (ii) any Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security that is issued as) a dividend or other distribution with respect to, or in exchange for, or in replacement of, the shares referenced in (i) above, excluding in all cases, however, any Registrable Securities sold by a person in a transaction in which his rights under this Section 1 are not assigned.

     (j) The number of shares of “Registrable Securities” outstanding shall be determined by the number of shares of Common Stock outstanding that are, and the number of shares of Common Stock issuable pursuant to then exercisable or convertible securities that are, Registrable Securities.

     (k) The term “Rule 144” shall mean Rule 144 under the Act.

     (l) The term “Rule 144(k)” shall mean subsection (k) of Rule 144 under the Act.

     (m) The term “SEC” shall mean the Securities and Exchange Commission.

          1.2 Request for Registration.

     (a) Subject to the conditions of this Section 1.2, if the Company shall receive at any time after six (6) months after the effective date of the Initial Offering, a written request from the Holders of fifty-one percent (51%) or more of the Registrable Securities then outstanding (for purposes of this Section 1.2, the “Initiating Holders”) that the Company file a registration statement under the Act covering the registration of Registrable Securities with an anticipated aggregate offering price of at least $10,000,000, then the Company shall, within twenty (20) days of the receipt thereof, give written notice of such request to all Holders, and subject to the limitations of this Section 1.2, use all commercially reasonable efforts to effect, as soon as practicable, the registration under the Act of all Registrable Securities that the Holders request to be registered in a written request received by the Company within twenty (20) days of the mailing of the Company’s notice pursuant to this Section 1.2(a); provided, however, that only one such request may be made by Holders during any twelve (12) month period.

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     (b) If the Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this Section 1.2 and the Company shall include such information in the written notice referred to in Section 1.2(a). In such event the right of any Holder to include its Registrable Securities in such registration shall be conditioned upon such Holder’s participation in such underwriting and the inclusion of such Holder’s Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder) to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by a majority in interest of the Initiating Holders (which underwriter or underwriters shall be reasonably acceptable to the Company). Notwithstanding any other provision of this Section 1.2, if the underwriter advises the Company that marketing factors require a limitation on the number of securities underwritten (including Registrable Securities), then the Company shall so advise all Holders of Registrable Securities that would otherwise be underwritten pursuant hereto, and the number of shares that may be included in the underwriting shall be allocated to the Holders of such Registrable Securities pro rata based on the number of Registrable Securities held by all such Holders (including the Initiating Holders). In no event shall any Registrable Securities be excluded from such underwriting unless all other securities are first excluded. Any Registrable Securities excluded or withdrawn from such underwriting shall be withdrawn from the registration.

     (c) Notwithstanding the foregoing, the Company shall not be required to effect a registration pursuant to this Section 1.2:

     (i) in any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, unless the Company is already subject to service in such jurisdiction and except as may be required under the Act; or

     (ii) after the Company has effected two (2) registrations pursuant to this Section 1.2, and such registrations have been declared or ordered effective; or

     (iii) during the period starting with the date sixty (60) days prior to the Company’s good faith estimate of the date of the filing of and ending on a date one hundred eighty (180) days following the effective date of a Company-initiated registration subject to Section 1.3 below, provided that the Company is actively employing in good faith all commercially reasonable efforts to cause such registration statement to become effective; or

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     (iv) if the Initiating Holders propose to dispose of Registrable Securities that may be registered on Form S-3 pursuant to Section 1.4 hereof; or

     (v) if the Company shall furnish to Holders requesting a registration statement pursuant to this Section 1.2 a certificate signed by the Company’s Chief Executive Officer or Chairman of the Board stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such registration statement to be effected at such time, in which event the Company shall have the right to defer such filing for a period of not more than one hundred twenty (120) days after receipt of the request of the Initiating Holders, provided that such right shall be exercised by the Company not more than once in any twelve (12) month period and provided further that the Company shall not register any securities for the account of itself or any other stockholder during such one hundred twenty (120) day period (other than a registration relating solely to the sale of securities of participants in a Company stock plan, a registration relating to a corporate reorganization or transaction under Rule 145 of the Act, a registration on any form that does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities, or a registration in which the only Common Stock being registered is Common Stock issuable upon conversion of debt securities that are also being registered).

          1.3 Company Registration.

     (a) If (but without any obligation to do so) the Company proposes to register (including for this purpose a registration effected by the Company for stockholders other than the Holders) any of its stock or other securities under the Act in connection with the public offering of such securities (other than a registration relating solely to the initial public offering of the Company’s securities, the sale of securities of participants in a Company stock plan, a registration relating to a corporate reorganization or transaction under Rule 145 of the Act, a registration on any form that does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities, or a registration in which the only Common Stock being registered is Common Stock issuable upon conversion of debt securities that are also being registered), the Company shall, at such time, promptly give each Holder written notice of such registration. Upon the written request of each Holder given within twenty (20) days after mailing of such notice by the Company in accordance with Section 9.5, the Company shall, subject to the provisions of Section 1.3(c), use all commercially reasonable efforts to cause to be registered under the Act all of the Registrable Securities that each such Holder requests to be registered.

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     (b) Right to Terminate Registration. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 1.3 prior to the effectiveness of such registration whether or not any Holder has elected to include securities in such registration. The expenses of such withdrawn registration shall be borne by the Company in accordance with Section 1.7 hereof.

     (c) Underwriting Requirements. In connection with any offering involving an underwriting of shares of the Company’s capital stock, the Company shall not be required under this Section 1.3 to include any of the Holders’ securities in such underwriting unless they accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by the Company (or by other persons entitled to select the underwriters) and enter into an underwriting agreement in customary form with such underwriters, and then only in such quantity as the underwriters determine in their sole discretion will not jeopardize the success of the offering by the Company. If the total amount of securities, including Registrable Securities, requested by stockholders to be included in such offering exceeds the amount of securities sold other than by the Company that the underwriters determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, that the underwriters determine in their sole discretion will not jeopardize the success of the offering. In no event shall any Registrable Securities held by holders that purchased shares of Series C Preferred Stock pursuant to the Series C/C-1 Agreement be excluded from such offering unless all other stockholders’ securities (including, without limitation, the holders of Series C-1 Preferred Stock) have been first excluded. In the event that the underwriters determine that less than all of the Registrable Securities requested to be registered can be included in such offering, then the Registrable Securities that are included in such offering shall be apportioned pro rata among the selling Holders based on the number of Registrable Securities held by all selling Holders or in such other proportions as shall mutually be agreed to by all such selling Holders. Notwithstanding the foregoing, in no event shall (i) the amount of securities of the selling Holders included in the offering be reduced below thirty percent (30%) of the total amount of securities included in such offering, unless such offering is the initial public offering of the Company’s securities, in which case the selling Holders may be excluded if the underwriters make the determination described above and no other stockholder’s securities are included in such offering. For purposes of the preceding sentence concerning apportionment, for any selling stockholder that is a Holder of Registrable Securities and that is a venture capital fund, mutual fund, business trust, partnership or corporation, the affiliated venture capital funds, mutual funds, business trusts, partners, retired partners and stockholders of such Holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single “selling Holder,” and any pro rata reduction with respect to such “selling Holder” shall be based upon the aggregate

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amount of Registrable Securities owned by all such related entities and individuals.

          1.4 Form S-3 Registration. In case the Company shall receive from Holders of Registrable Securities (for purposes of this Section 1.4, the “Initiating Holders”) a written request or requests that the Company effect a registration on Form S-3 and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company shall:

     (a) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders; and

     (b) use all commercially reasonable efforts to effect, as soon as practicable, such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holders’ Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holders joining in such request as are specified in a written request given within fifteen (15) days after receipt of such written notice from the Company, provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance, pursuant to this section 1.4:

     (i) if Form S-3 is not available for such offering by the Holders;

     (ii) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell less than 100,000 Registrable Securities (as adjusted for stock splits, stock dividends, combinations or the like);

     (iii) if the Company has, within the twelve (12) month period preceding the date of such request, already effected two registrations on Form S-3 for the Holders pursuant to this Section 1.4;

     (iv) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance;

     (v) during the period starting with the date sixty (60) days prior to the Company’s good faith estimate of the date of the filing of and ending on a date one hundred eighty (180) days following the effective date of, any registration statement pertaining to securities of the Company, provided that the Company is actively employing in good faith all commercially reasonable efforts to cause such registration statement to become effective; or

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     (vi) if the Company shall furnish to the Initiating Holders a certificate signed by the Company’s Chief Executive Officer or Chairman of the Board stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such registration statement to be effected at such time, in which event the Company shall have the right to defer such filing for a period of not more than ninety (90) days after receipt of the request of the Initiating Holders, provided that such right shall be exercised by the Company not more than once in any twelve (12) month period and provided further that the Company shall not register any securities for the account of itself or any other stockholder during such ninety (90) day period (other than a registration relating solely to the sale of securities of participants in a Company stock plan, a registration relating to a corporate reorganization or transaction under Rule 145 of the Act, a registration on any form that does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities, or a registration in which the only Common Stock being registered is Common Stock issuable upon conversion of debt securities that are also being registered).

     (c) If the Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this Section 1.4 and the Company shall include such information in the written notice referred to in Section 1.4(a). The provisions of Section 1.2(b) shall be applicable to such request (with the substitution of Section 1.4 for references to Section 1.2).

     (d) Subject to the foregoing, the Company shall file a registration statement covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Initiating Holders. Registrations effected pursuant to this Section 1.4 shall not be counted as requests for registration effected pursuant to Sections 1.2.

          1.5 Obligations of the Company. Whenever required under this Section 1 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible:

     (a) prepare and file with the SEC a registration statement with respect to such Registrable Securities and use all commercially reasonable efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for a period of up to one hundred twenty (120) days or, if earlier, until the distribution contemplated in the Registration Statement has been completed;

     (b) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such

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registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement;

     (c) furnish to the Holders such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them;

     (d) use all commercially reasonable efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions;

     (e) in the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering;

     (f) notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing;

     (g) cause all such Registrable Securities registered pursuant to this Section 1 to be listed on a national exchange or trading system and on each securities exchange and trading system on which similar securities issued by the Company are then listed; and

     (h) provide a transfer agent and registrar for all Registrable Securities registered pursuant hereunder and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration.

          1.6 Information from Holder. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 1 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be reasonably required to effect the registration of such Holder’s Registrable Securities.

          1.7 Expenses of Registration. All expenses other than underwriting discounts and commissions incurred in connection with registrations, filings or qualifications pursuant to Sections 1.2, 1.3 and 1.4, including (without limitation) all registration, filing and qualification fees, printers’ and accounting fees, fees and disbursements of counsel

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for the Company and the reasonable fees and disbursements of one counsel for the selling Holders shall be borne by the Company. Notwithstanding the foregoing, the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Section 1.2 or Section 1.4 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered (in which case all participating Holders shall bear such expenses pro rata based upon the number of Registrable Securities that were to be included in the withdrawn registration), unless, in the case of a registration requested under Section 1.2, the Holders of a majority of the Registrable Securities requested to be included in such registration agree to forfeit their right to one demand registration pursuant to Section 1.2 and provided, however, that if at the time of such withdrawal, the Holders have learned of a material adverse change in the condition, business or prospects of the Company from that known to the Holders at the time of their request and have withdrawn the request with reasonable promptness following disclosure by the Company of such material adverse change, then the Holders shall not be required to pay any of such expenses and shall retain their rights pursuant to Section 1.2 and 1.4.

          1.8 Delay of Registration. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 1.

          1.9 Indemnification. In the event any Registrable Securities are included in a registration statement under this Section 1:

     (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the partners, officers, directors, trustees and stockholders of each Holder, legal counsel and accountants for each Holder, any underwriter (as defined in the Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Act or the 1934 Act, against any losses, claims, damages or liabilities (joint or several) to which they may become subject under the Act, the 1934 Act, any state securities laws or any rule or regulation promulgated under the Act, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a “Violation”): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state in such registration statement a material fact required to be stated therein, or necessary to make the statements therein not misleading or (iii) any violation or alleged violation by the Company of the Act, the 1934 Act, any state securities laws or any rule or regulation promulgated under the Act, the 1934 Act or any state securities laws, and the Company will reimburse each such Holder, underwriter, controlling person or other aforementioned person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred;

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provided, however, that the indemnity agreement contained in this subsection 1.9(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation that occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter, controlling person or other aforementioned person; provided further, however, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any Holder or underwriter or other aforementioned person, or any person controlling such Holder or underwriter, from whom the person asserting any such losses, claims, damages or liabilities purchased shares in the offering, if a copy of the most current prospectus was not sent or given by or on behalf of such Holder or underwriter or other aforementioned person to such person, if required by law to have been so delivered, at or prior to the written confirmation of the sale of the shares to such person, and if the prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage or liability.

     (b) To the extent permitted by law, each selling Holder will indemnify and hold harmless, severally and not jointly, the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the Act, legal counsel and accountants for the Company, any underwriter, any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Act, the 1934 Act, any state securities laws or any rule or regulation promulgated under the Act, the 1934 Act or any state securities laws, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out, of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will reimburse any — person intended to be indemnified pursuant to this subsection 1.9(b) for any legal or other expenses reasonably incurred by such person in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the indemnity agreement contained in this subsection 1.9(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder (which consent shall not be unreasonably withheld), and provided that in no event shall any indemnity under this subsection 1.9(b) exceed the net proceeds from the offering received by such Holder.

     (c) Promptly after receipt by an indemnified party under this Section 1.9 of notice of the commencement of any action (including any

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governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 1.9, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties that may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of liability to the indemnified party under this Section 1.9 to the extent of such prejudice, but the omission to so deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 1.9.

     (d) If the indemnification provided for in this Section 1:9 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage or expense referred to herein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage or expense in such proportion’ as is appropriate to reflect the relative fault of the indemnifying party on the one hand and the indemnified party on the other hand in connection with the statements or omissions that resulted in such loss, liability, claim, damage or expense, as well as any other relevant equitable considerations; provided, however, that no contribution by any Holder, when combined with any amounts paid by such Holder pursuant to Section 1.9(b), shall exceed the net proceeds from the offering received by such Holder. The relative fault of the indemnifying party and the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.

     (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control.

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     (f) The obligations of the Company and Holders under this Section 1.9 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 1 and otherwise.

          1.10 Reports Under the 1934 Act. With a view to making available to the Holders the benefits of Rule 144 and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company agrees to use commercially reasonable efforts to:

     (a) make and keep public information available, as those terms are understood and defined in Rule 144, at all times after the effective date of the Initial Offering;

     (b) file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the 1934 Act; and

     (c) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144 (at any time after the effective date of the first registration statement filed by the Company), the Act and the 1934 Act (at any time after it has become subject to such reporting requirements), or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested to avail any Holder of any rule or regulation of the SEC that permits the selling of any such securities without registration or pursuant to such form.

          1.11 Assignment of Registration Rights. The rights to cause the Company to register Registrable Securities pursuant to this Section 1 may be assigned (but only with all related obligations) by a Holder to a transferee or assignee of such securities that (i) is a subsidiary, parent, partner, limited partner, retired partner, affiliated venture capital fund, affiliated mutual fund, affiliated business trust or stockholder of a Holder, (ii) is a Holder’s family member or trust for the benefit of an individual Holder, or (iii) after such assignment or transfer, holds at least 25,000 shares of Registrable Securities (subject to appropriate adjustment for stock splits, stock dividends, combinations or the like), provided: (a) the Company is, within ten (10) days after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; (b) such transferee or assignee agrees in writing to be bound by and subject to the terms and conditions of this Agreement, including, without limitation, the provisions of Section 1.13 below; (c) such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Act; and (d) such transferee is not a direct competitor of the Company, as determined in the good faith judgment of the Board of Directors, at the time of such transfer.

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          1.12 Limitations on Subsequent Registration Rights. From and after the date of this Agreement, the Company shall not, without the prior written consent of the holders of a majority of the Registrable Securities held by holders of the Company’s Series C Preferred Stock, enter into any agreement with any holder or prospective holder of any securities of the Company that would allow such holder or prospective holder (a) to include any of such securities in any registration filed under Section 1.2, Section 1.3 or Section 1.4 hereof, unless under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of such securities will not reduce the amount of the Registrable Securities of the Holders that are included or (b) to demand registration of their securities.

          1.13 “Market Stand-Off’ Agreement.

     (a) Each Holder hereby agrees that it will not, without the prior written consent of the managing underwriter, during the period commencing on the date of the final prospectus relating to the Company’s Initial Offering and ending on the date specified by the Company and the managing underwriter (such period not to exceed one hundred eighty (180) days) (i) lend, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock held immediately prior to the effectiveness of the Registration Statement for such offering, or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or other securities, in cash or otherwise. The foregoing provisions of this Section 1.13 shall apply only to the Company’s initial offering of equity securities, shall not apply to the sale of any shares to an underwriter pursuant to an underwriting agreement, and shall only be applicable to the Holders if all officers, directors and greater than two percent (2%) stockholders of the Company enter into similar agreements and such restrictions are not waived as to them. The underwriters in connection with the Company’s Initial Offering are intended third-party beneficiaries of this Section 1.13 and shall have the right, power and authority to enforce the provisions hereof as though they were a party hereto. Each Holder further agrees to execute such agreements as may be reasonably requested by the underwriters in the Company’s Initial Offering that are consistent with this Section 1.13 or that are necessary to give further effect thereto. Any discretionary waiver or termination of the restrictions of any or all of such agreements by the Company or the underwriters shall apply to all Holders subject to such agreements pro rata based on the number of shares subject to such agreements.

     In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the Registrable Securities of each Holder (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period.

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     (b) Each Holder agrees that a legend reading substantially as follows shall be placed on all certificates representing all Registrable Securities of each Holder (and the shares or securities of every other person subject to the restriction contained in this Section 1.13):

THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A LOCK-UP PERIOD OF UP TO 180 DAYS AFTER THE EFFECTIVE DATE OF THE ISSUER’S REGISTRATION STATEMENT FILED UNDER THE ACT, AS AMENDED, AS SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE ORIGINAL HOLDER OF THESE SECURITIES, A COPY OF WHICH MAY BE OBTAINED AT THE ISSUER’S PRINCIPAL OFFICE. SUCH LOCK-UP PERIOD IS BINDING ON TRANSFEREES OF THESE SHARES.

          1.14 Termination of Registration Rights. No Holder shall be entitled to exercise any right provided for in this Section 1 (i) after five (5) years following the consummation of the Initial Offering, (ii) as to any Holder, such earlier time after the Initial Offering at which such Holder (A) can sell all shares held by it in compliance with Rule 144(k) or (B) all Registrable Securities held by such Holder (together with any affiliate of the Holder with whom such Holder must aggregate its sales under Rule 144) can be sold in any three (3)-month period without registration in compliance with Rule 144 or (iii) after the consummation of a Liquidation Event, as that term is defined in the Company’s Amended and Restated Articles of Incorporation (as amended from time to time) (the “Restated Articles”).

          1.15 Black-Out Period.

     (a) Following the effectiveness of any registration statement and the filings with any state securities commissions, the Company shall be entitled to postpone or suspend, for a reasonable period of time, sales of Registrable Securities under such registration statement or any such filings upon written notice to the Holders that the Company has determined that such sales would in the good faith judgment of the Board of Directors of the Company (a) materially adversely impair the consummation of any pending or proposed material offering or sale of any class of securities by the Company or (b) require disclosure of material nonpublic information that, if disclosed at such time, would be materially harmful to the interest of the Company and its shareholders; provided, however, that during any such period all executive officers and directors of the Company are also prohibited from selling securities of the Company (or any security of any of the Company’s subsidiaries or affiliates). The Holder may recommence effecting sales of the Registrable Securities pursuant to the registration statement or such filings following further notice to such effect from the Company, such notice to be given by the Company not later than five (5) business days after the conclusion of the reason for the postponement or suspension. The Company shall use its best efforts to limit the length of any such period of suspended sales and

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shall use its best efforts to correct, amend or update any incomplete or misleading registration statement.

     (b) In the event of the suspension of effectiveness of any registration statement or other filings pursuant to this Section 1.15, the applicable time period during which such registration statement or other filing is to remain effective shall be extended by that number of days equal to the number of days the effectiveness of such registration statement or filing was suspended.

     2. Covenants of the Company.

     2.1 Delivery of Financial Statements. So long as any shares of Preferred Stock (as adjusted for stock splits, stock dividends, combinations or the like) remain outstanding, the Company shall deliver to each Investor (or transferee of an Investor) that holds at least 350,000 shares of Registrable Securities (as adjusted for stock splits, stock dividends, combinations or the like) (a “Major Investor”):

     (a) as soon as practicable, but in any event within ninety (90) days after the end of each fiscal year of the Company, an income statement for such fiscal year, a balance sheet of the Company and statement of stockholders’ equity as of the end of such year, and a statement of cash flows for such year, such year-end financial reports to be in reasonable detail, prepared in accordance with generally accepted accounting principles (“GAAP”), and audited and certified by independent public accountants of nationally recognized standing selected by the Company;

     (b) as soon as practicable, but in any event within forty-five (45) days after the end of each of the first three (3) quarters of each fiscal year of the Company, an unaudited income statement, statement of cash flows for such fiscal quarter and an unaudited balance sheet as of the end of such fiscal quarter.

     (c) within forty-five (45) days of the end of each month, an unaudited income statement and statement of cash flows and balance sheet for and as of the end of such month, in reasonable detail; and

     (d) as soon as practicable, but in any event at least thirty (30) days prior to the end of each fiscal year, a capital and operating budget and business plan for the next fiscal year, prepared on a monthly basis, including balance sheets, income statements and statements of cash flows for such months and, as soon as prepared, any other budgets or revised budgets prepared by the Company.

     2.2 Inspection. The Company shall permit each Major Investor, at such Major Investor’s expense, to visit and inspect the Company’s properties, to examine its books of account and records and to discuss the Company’s affairs, finances and accounts with its officers, all at such reasonable times as may be requested by the Major Investor; provided, however, that the Company shall not be obligated pursuant to this Section 2..2 to provide access to any information that it reasonably considers to be a trade secret or similar confidential information.

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     2.3 Termination of Information and Inspection Covenants. The covenants set forth in Sections 2.1 and 2.2 shall terminate and be of no further force or effect upon the earlier to occur of (i) the consummation of the sale of securities pursuant to a registration statement filed by the Company under the Act in connection with the firm commitment underwritten offering of its securities to the general public, (ii) when the Company first becomes subject to the periodic reporting requirements of Sections 13 or 15(d) of the 1934 Act, whichever event shall first occur or (iii) the consummation of a Liquidation Event, as that term is defined in the Restated Articles.

     2.4 Right of First Offer. Subject to the terms and conditions specified in this Section 2.4, the Company hereby grants to each Investor a right of first offer with respect to future sales by the Company of its Shares (as hereinafter defined). For purposes of this Section 2.4, the term “Investor” includes any general partners and affiliates of an Investor. An Investor shall be entitled to apportion the right of first offer hereby granted it among itself and its partners and affiliates in such proportions as it deems appropriate.

     Subject to Section 8.1 hereof, each time the Company proposes to offer any shares of, or securities convertible into or exchangeable or exercisable for any shares of, its capital stock (“Shares”), the Company shall first make an offering of such Shares to each Investor in accordance with the following provisions:

     (a) The Company shall deliver a notice in accordance with Section 3.5 (“Notice”) to the Investors stating (i) its bona fide intention to offer such Shares, (ii) the number of such Shares to be offered and (iii) the price and terms upon which it proposes to offer such Shares.

     (b) By written notification received by the Company within twenty (20) calendar days after the giving of Notice, each Investor may elect to purchase, at the price and on the terms specified in the Notice, up to that portion of such Shares that equals the product of the number of Shares times the fraction obtained by dividing (i) the sum of the total number of shares of (A) Common Stock issuable or issued upon conversion of the Preferred Stock then held by such Investor and (B) Common Stock issuable upon exercise of any options or warrants then held by such Investor by (ii) the sum of the total number of shares of (A) Common Stock, (B) Common Stock issuable upon the conversion of the Preferred Stock and (C) Common Stock issuable upon any exercise of any options or warrants then outstanding.

     (c) If all Shares that Investors are entitled to obtain pursuant to subsection 2.4(b) are not elected to be obtained as provided in subsection 2.4(b) hereof, the Company may, during the ninety (90) day period following the expiration of the period provided in subsection 2.4(b) hereof, offer the remaining unsubscribed portion of such Shares to any person or persons at a price not less than that, and upon terms no more favorable to the offeree than those, specified in the Notice. If the Company does not enter into an agreement for the sale of the Shares within such period, or if such is not consummated within sixty (60) days of the execution thereof, the right provided hereunder shall be deemed to be revived

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and such Shares shall not be offered unless first reoffered to the Investors in accordance herewith.

     (d) The right of first offer in this Section 2.4 shall not be applicable to (i) the issuance or sale of 1,740,575 shares of Common Stock (or options therefor) to employees, directors, consultants and other service providers for the primary purpose of soliciting or retaining their services pursuant to plans or agreements approved by the Company’s Board of Directors; (ii) the issuance of securities pursuant to a bona fide, firmly underwritten public offering of shares of Common Stock registered under the Act, (iii) the issuance of securities pursuant to the conversion or exercise of convertible or exercisable securities, (iv) the issuance of securities in connection with a bona fide business acquisition of or by the Company, whether by merger, consolidation, sale of assets, sale or exchange of stock or otherwise, (v) the issuance and sale of Series C Preferred Stock pursuant to the Series C/C-1 Agreement, or (vi) the issuance of warrants to purchase up to an aggregate of 200,000 shares of Common Stock with a per share exercise price equal to at least the fair market value as of the date of issue, as determined in good faith by the corporation’s Board of Directors (and the Common Stock issuable upon conversion thereof) in connection with the incurrence of indebtedness for money borrowed up to an aggregate of $5,000,000 from recognized commercial lending institutions. In addition to the foregoing, the right of first offer in this Section 2.4 shall not be applicable with respect to any Investor in any subsequent offering of Shares if (i) at the time of such offering, the Investor is not an “accredited investor,” as that term is then defined in Rule 501(a) of the Act and (ii) such offering of Shares is otherwise being offered only to accredited investors.

     (e) The rights provided in this Section 2.4 may not be assigned or transferred by any Investor except in connection with a transfer of Series C Preferred Stock or Series C-1 Preferred Stock permitted under, and made in full compliance with, Section 3.7 of the Series C/C-1 Agreement; provided, however, that, notwithstanding the foregoing, in no event shall an Investor assign or transfer such rights to a competitor of the Company (as determined in good faith by the Board of Directors of the Company).

     (f) The covenants set forth in this Section 2.4 shall terminate and be of no further force or effect upon the consummation of (i) the Company’s sale of its Common Stock or other securities pursuant to a Qualified Public Offering, as that term is defined in the Restated Articles or (ii) a Liquidation Event, as that term is defined in the Restated Articles.

     2.5 Proprietary Information and Inventions Agreements. The Company shall require all employees and consultants with access to confidential information to execute and deliver a proprietary information and inventions agreement or a consulting agreement, as applicable, in substantially the form approved by the Company’s Board of Directors.

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     2.6 Compensation and Audit Committees. The Board of Directors shall create and maintain a Compensation Committee and an Audit Committee, both of which shall include the Series B Director and, if so desired by the holders of at least a majority of the outstanding shares of Series C Preferred Stock, the Series C Director (as defined below) designated by Bessemer (as defined below).

     2.7 Director and Officer Liability Insurance. To the extent that such coverage is available on commercially reasonable terms (as determined in the good faith judgment of the Board of Directors), the Company shall purchase and at all times maintain director and officer liability insurance with coverage limits customary for similarly situated companies.

     2.8 Qualified Small Business Stock.

     (a) The Company shall not make any purchases of its stock or take other actions which would jeopardize the status of the Series C Preferred as “qualified small business stock” under Section 1202 of the Internal Revenue Code.

     (b) The Company will use commercially reasonable efforts to comply with any applicable filing and reporting requirements of Section 1202 of the internal Revenue Code, as amended or as may be amended from time to time, and any regulations promulgated thereunder; provided, however, that “reasonable efforts” as used in this Section 2.8(b) shall not be construed to require the Company to operate its business in a manner which would adversely affect its business, limit its future prospects or alter the timing or resource allocation related to its planned operations or financing activities.

     3. Board of Directors.

     3.1 Articles of Incorporation. (a) The Restated Articles provide that (a) holders of shares of Common Stock, voting together as a class, shall elect one (1) member of the Board of Directors (the “Common Director”), (b) holders of shares of the Company’s Series A Preferred Stock, voting together as a class, shall elect one (1) member of the Board of Directors (the “Series A Director”), (c) holders of shares of Series B Preferred Stock, voting together as a class, shall elect one (1) member of the Board of Directors (the “Series B Director”), (d) holders of shares of Series C Preferred Stock and Series C-1 Preferred Stock, voting together as a single class, shall elect two (2) members of the Board of Directors (the “Initial Series C Directors”), (e) the holders of shares of Common Stock and Series A Preferred Stock, voting together as a single class and not as separate series and on an as-converted to Common Stock basis, shall be entitled to elect one (1) member of the Board of Directors (the “Mutual Director”), and (f) holders of shares of Preferred Stock, voting together as a single class and not as separate series and on an as-converted to Common Stock basis, shall be entitled to elect one (1) member of the Board of Directors (the “Independent Director”).

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     (b) The Restated Articles also provide that upon the vote of a majority of the then outstanding shares of Series C Preferred Stock and Series C-1 Preferred Stock (voting together as a single class and not as separate series), the holders of such shares of Series C Preferred Stock and Series C-1 Preferred Stock shall be entitled to elect an additional two (2) directors of this corporation at any election of directors (the “Additional Series C Directors”).

     3.2 Agreement to Vote. Each Investor, as a holder of Preferred Stock and/or Common Stock, hereby agrees on behalf of itself and any transferee or assignee of any such shares of Preferred Stock or Common Stock, to hold all of the shares of Preferred Stock or Common Stock registered in its name (and any securities of the Company issued with respect to, upon conversion of, or in exchange or substitution of such Preferred Stock or Common Stock, and any other voting securities of the Company subsequently acquired by such Investor) (hereinafter collectively referred to as the “Investor Shares”) subject to, and to vote the Investor Shares at a regular or special meeting of stockholders (or by written consent) in accordance with, the provisions of this Agreement. Each Founder, as a holder of Common Stock (or options therefor) and/or Preferred Stock of the Company, hereby agrees on behalf of himself or herself and any transferee or assignee of any such shares of Common Stock or Preferred Stock, to hold all of such shares of Common Stock and Preferred Stock and any other securities of the Company acquired by such Founder in the future (and any securities of the Company issued with respect to, upon conversion of, or in exchange or substitution for such securities) (the “Founder Shares”) subject to, and to vote the Founder Shares at a regular or special meeting of stockholders (or by written consent) in accordance with, the provisions of this Agreement.

     3.3 Board Size. The holders of Investor Shares and Founder Shares shall vote at a regular or special meeting of stockholders (or by written consent) such shares that they own (or as to which they have voting power) to ensure that the size of the Board of Directors shall be set and remain at nine (9) directors; provided, however, that such Board of Directors, size may be subsequently increased or decreased pursuant to an amendment of this Agreement in accordance with Section 9.7 hereof.

     3.4 Election of Directors.

     (a) In any election of directors of the Company to elect the Common Director, the parties holding shares of Common Stock shall each vote at any regular or special meeting of stockholders (or by written consent) such number of shares of Common Stock then owned by them (or as to which they then have voting power) as may be necessary to elect the Company’s then-serving chief executive officer as a member of the Company’s Board of Directors.

     (b) In any election of directors of the Company to elect the Series A Director, the parties holding shares of Series A Preferred Stock shall each vote at any regular or special meeting of stockholders (or by written consent) such number of shares of Series A Preferred Stock then owned by them (or as to which

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they then have voting power) as may be necessary to elect one (1) director nominated by Venturi I, LLC.

     (c) In any election of directors of the Company to elect the Series B Director, the parties holding shares of Series B Preferred Stock shall each vote at any regular or special meeting of stockholders (or by written consent) such number of shares of Series B Preferred Stock then owned by them (or as to which they then have voting power) as may be necessary to elect one (1) director nominated by MPM Capital or its affiliated funds (“MPM” ).

     (d) In any election of directors of the Company to elect the Initial Series C Directors, the parties holding shares of Series C Preferred Stock and/or Series C1 Preferred Stock shall each vote at any regular or special meeting of stockholders (or by written consent) such number of shares of Series C Preferred Stock and Series C-1 Preferred Stock then owned by them (or as to which they then have voting power) as may be necessary to (i) elect one (1) director nominated by Bessemer Venture Partners or its affiliated funds (“Bessemer”), which director shall not be affiliated with MPM, and (ii) elect one (1) director nominated by MPM.

     (e) In any election of directors of the Company to elect the Mutual Director, the parties holding shares of Common Stock and/or Series A Preferred Stock shall each vote at any regular or special meeting of stockholders (or by written consent) such number of shares of Common Stock and Series A Preferred Stock then owned by them (or as to which they then have voting power) as may be necessary to elect one (1) director, which director shall not be affiliated with the Company, the Investors or the Founders.

     (f) In any election of directors of the Company to elect the Independent Director, the Investors and the Founders shall each vote at any regular or special meeting of stockholders (or by written consent) such number of shares of Preferred Stock of the Company then owned by them (or as to which they then have voting power) as may be necessary to elect the Independent Director, which director shall be not be affiliated with the Company, the Investors or the Founders.

     (g) In any election of directors of the Company to elect the Additional Series C Directors, the parties holding shares of Series C Preferred Stock and/or Series C-1 Preferred Stock shall each vote at any regular or special meeting of stockholders (or by written consent) such number of shares of Series C Preferred Stock and Series C-1 Preferred Stock then owned by them (or as to which they then have voting power) as may be necessary to (i) elect one (1) director nominated by the holders of a majority of the then outstanding shares of Series C Preferred Stock (voting together as a single class), and (ii) one (1) director nominated by the holders of a majority of the then outstanding shares of Series C Preferred Stock and Series C-1 Preferred Stock (voting together as a single class and not as separate series).

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     3.5 Removal; Vacancies. Any director of the Company may be removed from the Board of Directors in the manner allowed by law and the Restated Articles and Bylaws, but with respect to a director designated pursuant to Sections 3.4(a), 3.4(b), 3.4(c), 3.4(d)(i), 3.4(d)(ii), 3.4(e), 3.4(g)(i) and 3.4(g)(ii) above, only upon the vote or written consent of the stockholders entitled to designate such director. Vacancies on the Company’s Board of Directors shall be filled in accordance with the provisions set forth in the immediately preceding sentence.

     3.6 Legend. Each certificate representing any Investor Shares or Founder Shares shall be endorsed by the Company with a legend reading substantially as follows:

“THE SHARES EVIDENCED HEREBY ARE SUBJECT TO AN INVESTORS’ RIGHTS AGREEMENT (A COPY OF WHICH MAY BE OBTAINED UPON WRITTEN REQUEST FROM THE ISSUER), AND BY ACCEPTING ANY INTEREST IN SUCH SHARES THE PERSON ACCEPTING SUCH INTEREST SHALL BE DEEMED TO AGREE TO AND SHALL BECOME BOUND BY ALL THE PROVISIONS OF SAID INVESTORS’ RIGHTS AGREEMENT.”

     3.7 No Liability for Election of Recommended Directors. Neither the Company, the Founders, the Investors, nor any officer, director, stockholder, partner, employee or agent of any such party, makes any representation or warranty as to the fitness or competence of the nominee of any party hereunder to serve on the Company’s Board of Directors by virtue of such party’s execution of this Agreement or by the act of such party in voting for such nominee pursuant to this Agreement.

     3.8 Termination of Voting Provisions. The provisions of this Section 3 (other than Section 3.1) shall terminate and be of no further force or effect upon (a) the consummation of the Company’s sale of its Common Stock or other securities pursuant to a registration statement under the Act (other than a registration statement relating either to sale of securities to employees of the Company pursuant to its stock option, stock purchase or similar plan or a SEC Rule 145 transaction), or (b) the consummation of a Liquidation Event, as that term is defined in the Restated Articles.

     3.9 Board Observation Rights. For so long as Bessemer Venture Partners, NGEN and General Electric Pension Trust hold any shares of Series C Preferred Stock, each such Investor shall be entitled to have one observer at each board meeting and such observer shall be entitled to receive notice of and information regarding each meeting of the Company’s Board of Directors. Any such observer will be entitled to attend any meeting of the Company’s Board of Directors or, if a meeting is held by telephone conference, to participate therein by telephone. Any such observer shall have all rights of a director other than voting rights, including, without limitation, the right to reimbursement of the Investor’s reasonable out-of-pocket expenses incurred in the exercise of such Investor’s board observation rights.

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     4. Drag-Along Rights.

     4.1 Notwithstanding anything to the contrary in this Agreement or otherwise (including, without limitation, any special voting rights of the holders of shares of Series A, Series B or Series C-1 Preferred Stock set forth in the Restated Articles, beginning eighteen (18) months after the first closing under the Series C/C-1 Agreement (the “Initial Series C Closing”), if Investors and their affiliates (other than MPM and its affiliates and their transferees) holding a majority of the outstanding shares of Series C Preferred Stock (excluding shares of Series C-1 Preferred Stock), voting as a separate class (the “Dragging Stockholders”), approve a sale of greater than 90% of the Company’s outstanding shares of capital stock, on an as-converted basis, whether by way of merger, consolidation, sale of stock, or otherwise, or the sale of all or substantially all of the assets of the Company to a bona fide third party purchaser (an “Approved Sale”), then the Dragging Stockholders may require (the “Drag Along Right”) each other Investor and each Founder (solely in its capacity as a shareholder of the Company) (each a “Non-Participating Stockholder”) to sell, or cause to be sold, all shares of the Company’s capital stock held by such Non-Participating Stockholder in the Approved Sale; provided that, to the extent such Drag Along Right is being exercised prior to the date that is thirty-six (36) months following the Initial Series C Closing, the Non-Participating Stockholders’ obligations under this Section 4 shall be contingent on the Company’s Board of Directors approving the terms of such Approved Sale. Without limiting the foregoing, in the event the Dragging Stockholders are exercising the Drag Along Right pursuant to and in accordance with the terms and conditions set forth in the immediately preceding sentence, the Dragging Stockholders may require the Non-Participating Stockholders to consent to, vote in favor of, and raise no objection against, such Approved Sale, and, as applicable, if such Approved Sale is structured as a merger or consolidation, or a sale of all or substantially all of the assets of the Company, waive any dissenters’ rights, appraisal rights or similar rights in connection with such merger, consolidation or asset sale. Subject to Section 4.2 below, the terms and conditions of any such Approved Sale applicable to the Series C Preferred Stock and the Series C-1 Preferred Stock shall be identical in all material respects.

     4.2 In the event of any Approved Sale in which the Drag Along Right is exercised, the proceeds from such Approved Sale shall be allocated among Investors based upon the per share amount that would be received by such Investor as provided in the Restated Articles, as if the assets of the Company had been sold for the aggregate consideration to be received in the Approved Sale, and the proceeds distributed to Investors in accordance with the provisions of Article III, Section B(2).

     4.3 In the event the Dragging Stockholders desire to exercise their Drag Along Right, such Dragging Stockholders shall deliver to the Company and the Non Participating Stockholders written notice (the “Drag Notice”) setting forth the consideration per Share to be paid by such bona fide third-party purchaser and the other terms and conditions of the Approved Sale. Within ten (10) business days following the receipt of the Drag Notice, each of the Non Participating Stockholders (solely in its capacity as a shareholder of the Company) shall deliver to such Dragging Stockholders (i) in the case of an Approved Sale that involves the sale of shares of the Company’s

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capital stock, a certificate or certificates evidencing the shares of capital stock of the Company held by such Non Participating Stockholder, and an appropriate assignment separate from the certificate duly executed in a proper form to effect the transfer of such shares from the Non Participating Stockholders on the books and records of the Company pursuant to the terms of the Approved Sale and/or (ii) such other instruments, documents or agreements as may be required to effect the Approved Sale. Each Non Participating Stockholder (solely in its capacity as a shareholder of the Company) hereby grants to the Chairman of the Board of Directors a limited special power-of-attorney (as further described in Section 5 hereof) authorizing the Chairman of the Board of Directors to (i) effect the transfer of all such Non Participating Stockholder’s shares of the Company’s capital stock (and related transactions) pursuant to the terms of this Section 4 and the terms of such Approved Sale and/or (ii) consent to and/or vote in favor of such Approved Sale and waive any dissenters’ rights, appraisal rights or similar rights in connection with such Approved Sale. In the event that any Non Participating Stockholder shall fail to deliver such certificate(s), assignment separate from the certificate or other instruments, documents or agreements to the Dragging Stockholders exercising a Drag Along Right, then the Company shall cause a notation to be made on its books and records to reflect that the Shares of such Non Participating Stockholder are bound by the provisions of this Section 4, and the transfer of such shares of the Company’s capital stock may be effected in accordance with this Section 4 without such Non Participating Stockholder’s consent or surrender of its shares of the Company’s capital stock. In addition, in the event the Dragging. Stockholders exercise their Drag Along Right in accordance with the terms of this Section 4, the Non Participating Stockholders shall be required to make only such representations, warranties and indemnities as are made by the Dragging Stockholders.

     5. Limited Power of Attorney. Each Investor and each Founder (other than the Dragging Stockholders exercising their duly authorized Drag Along Right) (a “Granting Stockholder”), hereby constitutes the Chairman of the Board of Directors, with full power of substitution and resubstitution, its true and lawful attorney-in-fact for such Granting Stockholder and in such Granting Stockholder’s name, place and stead and for such Granting Stockholder’s use and benefit, to sign, execute, certify, acknowledge, swear to, file, deliver and record any and all agreements, certificates, instruments and other documents necessary in connection with the Dragging Stockholders exercising their duly authorized Drag Along Right for the purposes of effectuating such Drag Along Right. Each Granting Stockholder authorizes each such attorney-in-fact full power and authority to do and perform each and every act or thing whatsoever requisite to be done in connection with the foregoing as fully as such Granting Stockholder might or could do so personally, and hereby ratifying and confirming all that any such attorney-in-fact shall lawfully do or cause to be done by virtue thereof or hereof. This power of attorney is a special power of attorney coupled with an interest and is irrevocable, may be exercised by any such attorney-in-fact by listing the Granting Stockholder executing any agreement, certificate, instrument or other document with the single signature of any such attorney-in-fact acting as attorney-in-fact for such Granting Stockholder, shall survive the death, disability or cessation of existence of an Investor and shall survive the delivery of an assignment by a Granting Stockholder of the whole or a portion of the Granting Stockholder’s shares of the Company’s capital stock.

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     6. Pay-to-Play Financing. Subject to Section 8.2, each Investor and each Founder agrees (solely in its capacity as a shareholder of the Company) that it shall take all actions reasonably necessary to consummate a Pay-to-Play Financing (as defined in Article III, Section (B)(4)(m)(i) of the Restated Articles), including, without limitation, consenting to or voting in favor of any amendment to the Restated Articles required in order to consummate such Pay-to-Play Financing. This provision shall in no way be interpreted to create a requirement that any Investor participate in any such Pay-to-Play Financing.

     7. Reorganization of the Company. The Company agrees that it will use its reasonable best efforts to reorganize the Company as a Delaware corporation with the same capitalization and series and classes of shares, in each case having the same terms as existed immediately prior to such reorganization (the “Reorganization”), within ninety (90) days of the date hereof. In connection therewith, each Investor and each Founder (solely in its capacity as a shareholder of the Company) agrees to take all actions reasonably necessary to consummate the Reorganization, including, without limitation, consenting to or voting in favor of such actions as are reasonably necessary to effect the Reorganization. In connection with the consummation of the Reorganization, the Company, if requested by a member of the Board of Directors, will enter into an indemnification agreement with such member substantially in the form attached hereto as Exhibit A.

     8. Additional Covenants.

     8.1 Required Financing. If at any time after the date hereof, the Company’s aggregate available cash and cash equivalents (as set forth on the financial statements of the Company identified in Section 2.1 hereof) are less than:

     (a) $5 million but in excess of $2 million, the Company agrees that it will use its reasonable best efforts to (x) seek to raise additional debt and/or equity capital of not less than $6 million or (y) seek offers from bona fide third party purchasers to acquire the Company (whether by merger, stock sale, asset sale or otherwise); and

     (b) $2 million, the Company and each Investor and each Founder agrees (solely in its capacity as a shareholder of the Company) that Investors and their affiliates (other than MPM and its affiliates or their respective transferees) holding a majority of the outstanding shares of Series C Preferred Stock shall have the right to compel a Required Financing. For the purposes of this section a “Required Financing” shall mean an equity financing of the Company on terms and conditions (including, without limitation, pricing, dividends, liquidation preference, conversion price, anti-dilution rights and special voting rights) proposed by Investors and their affiliates (other than MPM and its affiliates or their respective transferees) holding a majority of the outstanding shares of Series C Preferred Stock.

Notwithstanding anything to the contrary (including, without limitation, Section 2.4 hereof), in the event that Investors and their affiliates (other than MPM and its affiliates or their respective transferees) holding a majority of the outstanding shares of Series C

24

Preferred Stock compel a Required Financing, each holder of Preferred Stock and each holder of Common Stock shall have the right to participate in such Required Financing on a pro rata, as converted basis (the “Participation Right”). In furtherance of the foregoing, for the purposes of Article III, Section (B)(4)(m)(i) of the Restated Articles, each holder of Preferred Stock agrees that the Participation Right shall be deemed to be included in the right of first offer set forth in Section 2.4 hereof. In addition, each Investor and each Founder (solely in its capacity as a shareholder of the Company) agrees that it shall take all actions reasonably necessary to consummate such Required Financing, including, without limitation, consenting to or voting in favor of any amendment to the Restated Articles required in order to consummate such Required Financing. This provision shall in no way be interpreted to create a requirement that any Investor or Founder participate in any such Required Financing.

     8.2 Consent to Pay-to-Play. Notwithstanding anything to the contrary (including, without limitation, any provision of the Restated Articles), the Company agrees that so long as at least 1,200,000 shares of Series C Preferred Stock remain outstanding (as adjusted for any stock splits, stock dividends, combinations, subdivisions, recapitalizations or the like), the Company shall not (by amendment, merger, consolidation or otherwise) without first obtaining the approval (by vote or written consent, as provided by law) of the holders of a majority of the then outstanding shares of Series C Preferred Stock not held by MPM or any of its affiliates or their respective transferees (as adjusted for any stock splits, stock dividends, combinations, subdivisions, recapitalizations or the like) consummate any Pay-to-Play Financing (as defined in Article III, Section (B)(4)(m)(i) of the Restated Articles as in effect on the date hereof).

     8.3 Investors’ Rights Agreement. As a result of a typographical error, the date of the Agreement referred to in the Restated Articles is January 23, 2004. The Company and each party hereto agrees that for all purposes, this Agreement shall be the agreement referred to in the Articles as “the Investors’ Rights Agreement dated as of January 23, 2004”.

     9. Miscellaneous.

     9.1 Successors and Assigns. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any shares of Registrable Securities). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.

     9.2 Governing Law. This Agreement shall be interpreted under the laws of the State of Minnesota without reference to Minnesota conflicts of law provisions.

     9.3 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

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     9.4 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.

     9.5 Notices. All notices and other communications given or made pursuant hereto shall be in writing and shall be deemed effectively given: (i) upon personal delivery to the party to be notified, (ii) when sent by confirmed electronic mail or facsimile if sent during normal business hours of the recipient; if not, then on the next business day, (iii) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (iv) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the respective parties at the addresses set forth on the signature pages attached hereto (or at such other addresses as shall be specified by notice given in accordance with this Section 9.5).

     9.6 Expenses. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys’ fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled.

     9.7 Entire Agreement; Amendments and Waivers. This Agreement (including the Exhibits hereto, if any) constitutes the full and entire understanding and agreement among the parties with regard to the subjects hereof and thereof Any term of this Agreement (other than Section 2.1, Section 2.2, Section 2.3, Section 3, Section 4 and Section 5) may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company, the holders of a majority of the Registrable Securities and the holders of at least a majority of the issued and outstanding shares of Series C Preferred Stock. The provisions of Section 2.1, Section 2.2 and Section 2.3 may be amended or waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company, the holders of a majority of the Registrable Securities that are held by Major Investors, and the holders of at least a majority of the issued and outstanding shares of Series C Preferred Stock. The provisions of Section 3 may be amended and the observance of any term hereof may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company and the holders of a majority of the then outstanding voting securities held by the Investors; provided, however, that notwithstanding the foregoing, (a) the provisions of Section 3.4(b) may be amended and the observance of any term thereof may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of Venturi I, LLC, (b) the provisions of Section 3.4(c) may be amended and the observance of any term thereof may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of MPM, (c) the provisions of Section 3.4(d)(i) may be amended and the observance of any term thereof may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of Bessemer, (d) the provisions of Section 3.4(d)(ii) may be amended and the observance of any term thereof

26

may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of MPM, (e) the provisions of Section 3.4(e) may be amended and the observance of any term thereof may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the holders of a majority of the outstanding voting securities held by the holders of shares of Common Stock and Series A Preferred Stock (voting together as a single class and not as separate series and on an as-converted to Common Stock basis), (f) the provisions of Section 3.4(g)(i) may be amended and the observance of any term thereof may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of holders of a majority of the outstanding shares of Series C Preferred Stock, (g) the provisions of Section 3.4(g)(ii) may be amended and the observance of any term thereof may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the holders of a majority of the then outstanding shares of Series C Preferred Stock and Series C-1 Preferred Stock (voting together as a single class and not as separate series) and (h) the provisions of Section 3.9 may be amended and the observance of any term thereof may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of Bessemer, NGEN and General Electric Pension Trust. The provisions of Section 4, Section 5, Section 6 and Section 7 may be amended or waived (either generally or in a particular instance and either retroactively or prospectively, as applicable) only with the written consent of the Company, and the holders of at least a majority of the issued and outstanding shares of Series C Preferred Stock; provided, however, that such provisions may not be amended or waived in such a way as to add to the obligations of any Non Participating Stockholder without the consent of such Non Participating Stockholder. The provisions of Section 8 may be amended or waived (either generally or in a particular instance and either retroactively or prospectively, as applicable) only with the written consent of the Company, and the holders of at least a majority of the issued and outstanding shares of Series C Preferred Stock (other than MPM and its affiliates or their transferees); provided, however, that such provisions may not be amended or waived in such a way as to add to the obligations of any Investor or Founder without the consent of such Investor or Founder. Any amendment or waiver effected in accordance with this paragraph shall be binding upon all the parties hereto.

     9.8 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision(s) shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision(s) were so excluded and shall be enforceable in accordance with its terms.

     9.9 Aggregation of Stock. All shares of Registrable Securities held or acquired by affiliated entities (including affiliated venture capital funds) or persons shall be aggregated together for the purpose of determining the availability of any rights under this Agreement.

     9.10 Restrictions of Transfer. In addition to, and not in limitation of the rights of an Investor to transfer its rights hereunder, an Investor’s rights and obligations hereunder may be transferred to any of such Investor’s “affiliates,” as that term is defined

27

under the Securities Act (and which, in the case of Putnam, shall include any fund or account managed or advised by Putnam Investment Management, LLC, TH Lee, Putnam Capital Management, LLC or their respective affiliates), so long as such affiliate is an “accredited investor” (within the meaning of Regulation D under the Securities Act); provided that the prospective transferee agrees in writing to be subject to the terms hereof to the same extent as if he, she or it were an original Investor hereunder.

     9.11 Massachusetts Business Trusts. A copy of the Agreement and Declaration of Trust of each Putnam fund or series investment company (each, a “Fund”) that is a Massachusetts business trust is on file with the Secretary of State of the Commonwealth of Massachusetts, and notice is hereby given that this Agreement is executed on behalf of such Fund by the Trustees of the relevant Fund as Trustees, and not individually, and that the obligations of this Agreement are not binding upon any of the Trustees, officers or shareholders of the Fund individually but are binding only upon the assets and property of such Fund.

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     IN WITNESS WHEREOF, the parties have executed this Investors’ Rights Agreement as of the date first above written.

RESTORE MEDICAL, INC.
By:	/s/ Susan L. Critzer
	Name:	Susan L. Critzer
	Title:	President and Chief Executive
		Officer
Address:		2800 Patton Road
		St. Paul, MN 55113

SIGNATURE PAGE TO RESTORE MEDICAL, INC.
INVESTORS’ RIGHTS AGREEMENT

FOUNDERS:
By:	/s/ Robert Campbell
	Robert Campbell
Address:

SIGNATURE PAGE TO RESTORE MEDICAL, INC.
INVESTORS’ RIGHTS AGREEMENT

FOUNDERS:
By:	/s/ Timothy R. Conrad
	Timothy R. Conrad
Address:

SIGNATURE PAGE TO RESTORE MEDICAL, INC.
INVESTORS’ RIGHTS AGREEMENT

FOUNDERS:
By:	/s/ Susan L. Critzer
	Susan L. Critzer
Address:

SIGNATURE PAGE TO RESTORE MEDICAL, INC.
INVESTORS’ RIGHTS AGREEMENT

FOUNDERS:
By:	/s/ Mark B. Knudson
	Mark B. Knudson
Address:

SIGNATURE PAGE TO RESTORE MEDICAL, INC.
INVESTORS’ RIGHTS AGREEMENT

FOUNDERS:
By:	/s/ Edward W. Numainville
	Edward W. Numainville
Address:

SIGNATURE PAGE TO RESTORE MEDICAL, INC.
INVESTORS’ RIGHTS AGREEMENT

INVESTORS:
MPM BIOVENTURES II, L.P.
By: MPM Asset Management II, L.P., its General Partner
By: MPM Asset Management II LLC, its General Partner
By:	/s/ Luke Evnin
Name: Luke Evnin
Title: Manager
MPM BIOVENTURES II-QP, L.P.
By: MPM Asset Management II, L.P., its General Partner
By: MPM Asset Management II LLC, its General Partner
By:	/s/ Luke Evnin
Name: Luke Evnin
Title: Manager
MPM BIOVENTURES GMBH & CO. PARALLEL BETEILIGUNGS KG
By: MPM Asset Management II, L.P., in its capacity as
the Special Limited Partner
By: MPM Asset Management II LLC, its General Partner
By:	/s/ Luke Evnin
Name: Luke Evnin
Title: Manager
MPM ASSET MANAGEMENT INVESTORS 2000 B LLC
By:	/s/ Luke Evnin
Name: Luke Evnin
Title: Manager
Address:

SIGNATURE PAGE TO RESTORE MEDICAL, INC.
INVESTORS’ RIGHTS AGREEMENT

INVESTORS:
BESSEMER VENTURE PARTNERS VI L.P.
By: Deer VI & Co. LLC, General Partner/Managing Member
By:	/s/ J. Edmund Colloton
	J. Edmund Colloton, Manager
Address:
c/o Bessemer Venture Partners
1865 Palmer Ave #104
Larchmont, NY 10538
Attn: J. Edmund Colloton

SIGNATURE PAGE TO RESTORE MEDICAL, INC.
INVESTORS’ RIGHTS AGREEMENT

INVESTORS:
 

/s/ Chris Gabriel  

Chris Gabriel 

SIGNATURE PAGE TO RESTORE MEDICAL, INC.
INVESTORS’ RIGHTS AGREEMENT

INVESTORS:
TH LEE, PUTNAM INVESTMENT TRUST — TH LEE,
PUTNAM EMERGING OPPORTUNITIES PORTFOLIO
By: TH Lee, Putnam Capital Management, LLC
By:	/s/ Michael E. DeFao
	Name: Michael E. DeFao
	Title: Vice President
Address:		Putnam Investments
		One Post Office Square
		Boston, MA 02109

SIGNATURE PAGE TO RESTORE MEDICAL, INC.
INVESTORS’ RIGHTS AGREEMENT

INVESTORS:
GENERAL ELECTRIC PENSION TRUST
By. GE Asset Management Incorporated, its
Investment Manager
By:	/s/ Patrick J. McNeela
	Name: Patrick J. McNeela
	Title: Vice President
Address:		3003 Summer Street
		Stramford, CT 06905

SIGNATURE PAGE TO RESTORE MEDICAL, INC.
INVESTORS’ RIGHTS AGREEMENT

INVESTORS:
NGEN ENABLING TECHNOLOGIES FUND, L.P.
By:	/s/ Steven Park
	Name: Steven Park
	Title: Member
Address:

SIGNATURE PAGE TO RESTORE MEDICAL, INC.
INVESTORS’ RIGHTS AGREEMENT

INVESTORS:
3V SOURCEONE VENTURES FUND LIMITED
By:	/s/ Michael Ming-Yih Wu
	Name:	Michael Ming-Yih Wu
	Title:	Managing Director
		3V SourceOne Capital Pte Ltd, Fund Manager
		of 3V SourceOne Ventures Fund Limted
Address:		321 Orchard Road, #08-06
		Orchard Shopping Centre
		Singapore 238866
3V SOURCEONE VENTURES FUND, L.P.
By:	/s/ Michael Ming-Yih Wu
	Name:	Michael Ming-Yih Wu
	Title:	Manager
		3V SourceOne Capital, LLC, General Partner
		of 3V SourceOne Ventures Fund, L.P.
Address:		13888 Trinity Avenue
		Saratoga, CA 95070

SIGNATURE PAGE TO RESTORE MEDICAL, INC.
INVESTORS’ RIGHTS AGREEMENT

INVESTORS:
/s/ Wes Sterman
Wes Sterman
Address:	2121 Sacramento Street, #604
	San Francisco, CA 94109

SIGNATURE PAGE TO RESTORE MEDICAL, INC.
INVESTORS’ RIGHTS AGREEMENT

INVESTORS:
CHARTER VENTURES L.P.
By:	/s/ A. Barr Dolan
	Name: A. Barr Dolan
	Title:
Address:

SIGNATURE PAGE TO RESTORE MEDICAL, INC.
INVESTORS’ RIGHTS AGREEMENT

INVESTORS:
EVENTYR INVESTMENTS, L.P.
By:	/s/ Roe H. Hatlen
	Name: Roe H. Hatlen
	Title: General Partner
Address:

SIGNATURE PAGE TO RESTORE MEDICAL, INC.
INVESTORS’ RIGHTS AGREEMENT

INVESTORS:
VENTURI I, LLC
By:	/s/ Mark B. Knudson
	Name: Mark B. Knudson
	Title:   Chief Executive Officer
Address:		2800 Patton Road    St. Paul, MN 55113

SIGNATURE PAGE TO RESTORE MEDICAL, INC.
INVESTORS’ RIGHTS AGREEMENT

INVESTORS:

/s/ Mark B. Knudson

Mark B. Knudson

Address:

SIGNATURE PAGE TO RESTORE MEDICAL, INC.
INVESTORS’ RIGHTS AGREEMENT

INVESTORS:
/s/ Linda Johnson
Linda Johnson
Address: 11 Brunswick Lane
	Lincolnshire, IL 60069

SIGNATURE PAGE TO RESTORE MEDICAL, INC.
INVESTORS’ RIGHTS AGREEMENT

INVESTORS:
/s/ Timothy I. Maudlin
Timothy I. Maudlin
Address: 8833 Hidden Oaks Drive
	Eden Prairie, MN 55344

SIGNATURE PAGE TO RESTORE MEDICAL, INC.
INVESTORS’ RIGHTS AGREEMENT

INVESTORS:

/s/ Robert S. Nickoloff

Robert S. Nickoloff

Address:

SIGNATURE PAGE TO RESTORE MEDICAL, INC.
INVESTORS’ RIGHTS AGREEMENT

INVESTORS:
STATE STREET BANK AND TRUST COMPANY AS TRUSTEE
FOR THE DUPONT PENSION TRUST
By:	/s/ Joette T. Levine
	Name: Joette T. Levine
	Title: Vice President
Address:

SIGNATURE PAGE TO RESTORE MEDICAL, INC.
INVESTORS’ RIGHTS AGREEMENT

INVESTORS:
WILTON PRIVATE EQUITY FUND, LLC
By:	Wilton Asset Management, L.L.C., its
	Manager
By:	/s/ Carmen J. Gigliotti
	Name: Carmen J. Gigliotti
	Title: President
Address:
	Carmen Gigliotti
	DuPont Capital Management
	Delaware Corporate Center
	One Righter Parkway, Suite 3200
	Wilmington, DE 19803
	Please send copy of all notices to:
	Joseph Lyons
	State Street Global Advisors
	State Street Financial Center
	One Lincoln Street
	Boston, MA 02111-2900

SIGNATURE PAGE TO RESTORE MEDICAL, INC.
INVESTORS’ RIGHTS AGREEMENT

SCHEDULE A

Bessemer Venture Partners VI L.P.
Christopher Gabrieli

TH Lee, Putnam Investment Trust — TH Lee, Putnam Emerging Opportunities Portfolio

MPM BioVentures II, L.P.
MPM BioVentures II-QP, L.P.
MPM BioVentures GmbH & Co. Parallel-Beteiligungs KG
MPM Asset Management Investors 2000 B LLC

Venturi I, LLC

General Electric Pension Trust

NGEN Enabling Technologies Fund, L.P.

3V SourceOne Ventures Fund Limited
3V SourceOne Ventures Fund, L.P.

Wes Sterman

Charter Ventures L.P.

Eventyr Investments, L.P.

Mark B. Knudson

Timothy I. Maudlin

Robert S. Nickoloff

Linda Johnson

S-A-1

SCHEDULE B

Susan L. Critzer
Robert Campbell
Mark B. Knudson
Timothy R. Conrad
Edward W. Numainville

S-B-1

EXHIBIT A

INDEMNIFICATION AGREEMENT

     THIS AGREEMENT (the “Agreement”) is made and entered into as of _________, 200___ between Restore Medical Inc., a Minnesota corporation (the “Company”), and ____________(“Director”).

     WITNESSETH THAT:

     WHEREAS, Director performs a valuable service for the Company;

     WHEREAS, the Board of Directors of the Company has adopted Bylaws (the “Bylaws”) providing for the indemnification of the officers and directors of the Company to the maximum extent authorized by Section 145 of the Delaware General Corporation Law, as amended (“Law”);

     WHEREAS, the Bylaws and the Law, by their nonexclusive nature, permit contracts between the Company and the officers or directors of the Company with respect to indemnification of such officers or directors;

     WHEREAS, in accordance with the authorization as provided by the Law, the Company may purchase and maintain a policy or policies of directors’ and officers’ liability insurance (“D & 0 Insurance”), covering certain liabilities which may be incurred by its officers or directors in the performance of their obligations to the Company; and

     WHEREAS, in order to induce Director to continue to serve as a director of the Company, the Company has determined and agreed to enter into this contract with Director with the explicit acknowledgement of the intended third party beneficiaries set forth in Section 1 hereof.

     NOW, THEREFORE, in consideration of Director’s service as a director after the date hereof, the parties hereto agree as follows:

     1. Indemnity of Indemnitee. The Company hereby agrees to hold harmless and indemnify Director and each venture capital entity of which Director is a partner, member, officer or director and each of the respective directors, officers, partners, members, stockholders, employees, agents and spouses, as applicable, of each such entity (each, including, without limitation, the Director, an “Indemnitee”) to the full extent authorized or permitted by the provisions of the Law, as such may be amended from time to time, and the Bylaws (or other applicable charter documents of the Company), as such may be amended. In furtherance of the foregoing indemnification, and without limiting the generality thereof:

     (a) Proceedings Other Than Proceedings by or in the Right of the Company. Indemnitee shall be entitled to the rights of indemnification provided in this Section 1(a) if, by reason of Director’s Corporate Status (as hereinafter defined), he is, or is threatened

A-1

to be made, a party to or participant in any Proceeding (as hereinafter defined) other than a Proceeding by or in the right of the Company. Pursuant to this Section 1(a), Indemnitee shall be indemnified against all Expenses (as hereinafter defined), judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such Proceeding or any claim, issue or matter therein, if the Director acted in good faith and in a manner Director reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal Proceeding, the Director had no reasonable cause to believe his conduct was unlawful.

     (b) Proceedings by or in the Right of the Company. Indemnitee shall be entitled to the rights of indemnification provided in this Section 1(b) if, by reason of Director’s Corporate Status, he is, or is threatened to be made, a party to or participant in any Proceeding brought by or in the right of the Company. Pursuant to this Section 1(b), Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection with such Proceeding if the Director acted in good faith and in a manner the Director reasonably believed to be in or not opposed to the best interests of the Company; provided, however, that, if applicable law so provides, no indemnification against such Expenses shall be made in respect of any claim, issue or matter in such Proceeding as to which Indemnitee shall have been adjudged to be liable to the Company unless and to the extent that the Court of Chancery of the State of Delaware shall determine that such indemnification may be made.

     (c) Indemnification for Expenses of a Party Who is Wholly or Partly Successful. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of Director’s Corporate Status, a party to and is successful, on the merits or otherwise, in any Proceeding, he shall be indemnified to the maximum extent permitted by law against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or on his behalf in connection with each successfully resolved claim, issue or matter. For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.

     2. Additional Indemnity. In addition to, and without regard to any limitations on, the indemnification provided for in Section 1, the Company shall and hereby does indemnify and hold harmless Indemnitee against all Expenses, judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf if, by reason of Director’s Corporate Status, he is, or is threatened to be made, a party to or participant in any Proceeding (including a Proceeding by or in the right of the Company), including, without limitation, all liability arising out of the negligence or active or passive wrongdoing of Indemnitee. The only limitation that shall exist upon the Company’s obligations pursuant to this Agreement shall be that the Company shall not be obligated to make any payment to Indemnitee that is finally determined (under the procedures, and subject to the presumptions, set forth in Sections 6 and 7 hereof) to be unlawful under Delaware law.

A-2

     3. Contribution in the Event of Joint Liability.

     (a) Whether or not the indemnification provided in Sections 1 and 2 hereof is available, in respect of any threatened, pending or completed action, suit or proceeding in which Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), Company shall pay, in the first instance, the entire amount of any judgment or settlement of such action, suit or proceeding without requiring Indemnitee to contribute to such payment and Company hereby waives and relinquishes any right of contribution it may have against Indemnitee. Company shall not enter into any settlement of any action, suit or proceeding in which Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding) unless such settlement provides for a full and final release of all claims asserted against Indemnitee.

     (b) Without diminishing or impairing the obligations of the Company set forth in the preceding subparagraph, if, for any reason, Indemnitee shall elect or be required to pay all or any portion of any judgment or settlement in any threatened, pending or completed action, suit or proceeding in which Company is jointly liable with Indenmitee (or would be if joined in such action, suit or proceeding), Company shall contribute to the amount of expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred and paid or payable by Indemnitee in proportion to the relative benefits received by the Company and all officers, directors or employees of the Company other than the Director who are jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), on the one hand, and Indemnitee, on the other hand, from the transaction from which such action, suit or proceeding arose; provided, however, that the proportion determined on the basis of relative benefit may, to the extent necessary to conform to law, be further adjusted by reference to the relative fault of Company and all officers, directors or employees of the Company other than the Director who are jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), on the one hand, and Indemnitee, on the other hand, in connection with the events that resulted in such expenses, judgments, fines or settlement amounts, as well as any other equitable considerations which the law may require to be considered.

     (c) Company hereby agrees to fully indemnify and hold Indemnitee harmless from any claims of contribution which may be brought by officers, directors or employees of the Company other than the Director who may be jointly liable with Indemnitee.

     4. Indemnification for Expenses of a Witness. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of Director’s Corporate Status, a witness in any Proceeding to which Indemnitee is not a party, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith.

     5. Advancement of Expenses. Notwithstanding any other provision of this Agreement, the Company shall advance all Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding by reason of Director’s Corporate Status within ten (10) days after the receipt by the Company of a statement or statements from Indemnitee requesting such

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advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by an undertaking by or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately be determined that Indemnitee is not entitled to be indemnified against such Expenses. Any advances and undertakings to repay pursuant to this Section 5 shall be unsecured and interest free. Notwithstanding the foregoing, the obligation of the Company to advance Expenses pursuant to this Section 5 shall be subject to the condition that, if, when and to the extent that the Company determines that Indemnitee would not be permitted to be indemnified under applicable law, the Company shall be entitled to be reimbursed, within thirty (30) days of such determination, by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid; provided, however, that if Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, any determination made by the Company that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any advance of Expenses until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed).

     6. Procedures and Presumptions for Determination of Entitlement to Indemnification. It is the intent of this Agreement to secure for Indemnitee rights of indemnity that are as favorable as may be permitted under the law and public policy of the State of Delaware. Accordingly, the parties agree that the following procedures and presumptions shall apply in the event of any question as to whether Indemnitee is entitled to indemnification under this Agreement:

     (a) To obtain indemnification (including, but not limited to, the advancement of Expenses and contribution by the Company) under this Agreement, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The Secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Board of Directors in writing that Indemnitee has requested indemnification.

     (b) Upon written request by Indemnitee for indemnification pursuant to the first sentence of Section 6(a) hereof, a determination, if required by applicable law, with respect to Indemnitee’s entitlement thereto shall be made in the specific case by one of the following three methods, which shall be at the election of Indemnitee: (1) by a majority vote of the disinterested directors, even though less than a quorum, or (2) by independent legal counsel in a written opinion, or (3) by the stockholders.

     (c) If the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 6(b) hereof, the Independent Counsel shall be selected as provided in this Section 6(c). The Independent Counsel shall be selected by Indemnitee (unless Indemnitee shall request that such selection be made by the Board of Directors). Indemnitee or the Company, as the case may be, may, within ten (10) days

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after such written notice of selection shall have been given, deliver to the Company or to Indemnitee, as the case may be, a written objection to such selection; provided, however, that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of “Independent Counsel” as defined in Section 13 of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person so selected shall act as Independent Counsel. If a written objection is made and substantiated, the Independent Counsel selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit. If, within twenty (20) days after submission by Indemnitee of a written request for indemnification pursuant to Section 6(a) hereof, no Independent Counsel shall have been selected and not objected to, either the Company or Indemnitee may petition the Court of Chancery of the State of Delaware or other court of competent jurisdiction for resolution of any objection which shall have been made by the Company or Indemnitee to the other’s selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the court or by such other person as the court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under Section 6(b) hereof. The Company shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with acting pursuant to Section 6(b) hereof, and the Company shall pay all reasonable fees and expenses incident to the procedures of this Section 6(c), regardless of the manner in which such Independent Counsel was selected or appointed.

     (d) In making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 6(a) of this Agreement. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion, by clear and convincing evidence.

     (e) Indemnitee shall be deemed to have acted in good faith if Indemnitee’s action is based on the records or books of account of the Enterprise, including financial statements, or on information supplied to an Indemnitee by the officers of the Enterprise in the course of their duties, or on the advice of legal counsel for the Enterprise or on information or records given or reports made to the Enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Enterprise. In addition, the knowledge and/or actions, or failure to act, of any director, officer, agent or employee of the Enterprise shall not be imputed to Indemnitee for purposes of determining the right to indemnification under this Agreement. Whether or not the foregoing provisions of this Section 6(e) are satisfied, it shall in any event be presumed that Indemnitee has at all times acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion, by clear and convincing evidence.

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     (f) If the person, persons or entity empowered or selected under Section 6 to determine whether Indemnitee is entitled to indemnification shall not have made a determination within thirty (30) days after receipt by the Company of the request therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made and Indemnitee shall be entitled to such indemnification, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law; provided, however, that such thirty (30) day period may be extended for a reasonable time, not to exceed an additional fifteen (15) days, if the person, persons or entity making the determination with respect to entitlement to indemnification in good faith requires such additional time for the obtaining or evaluating documentation and/or information relating thereto; and provided, further, that the foregoing provisions of this Section 6(g) shall not apply if the determination of entitlement to indemnification is to be made by the stockholders pursuant to Section 6(b) of this Agreement and if (A) within fifteen (15) days after receipt by the Company of the request for such determination the Board of Directors or the Disinterested Directors, if appropriate, resolve to submit such determination to the stockholders for their consideration at an annual meeting thereof to be held within seventy five (75) days after such receipt and such determination is made thereat, or (B) a special meeting of stockholders is called within fifteen (15) days after such receipt for the purpose of making such determination, such meeting is held for such purpose within sixty (60) days after having been so called and such determination is made thereat.

     (g) Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee’s entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any Independent Counsel, member of the Board of Directors, or stockholder of the Company shall act reasonably and in good faith in making a determination under the Agreement of the Indemnitee’s entitlement to indemnification. Any costs or expenses (including attorneys’ fees and disbursements) incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee’s entitlement to indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom.

     (h) The Company acknowledges that a settlement or other disposition short of final judgment may be successful if it permits a party to avoid expense, delay, distraction, disruption and uncertainty. In the event that any action, claim or proceeding to which Indemnitee is a party is resolved in any manner other than by adverse judgment against Indemnitee (including, without limitation, settlement of such action, claim or proceeding with or without payment of money or other consideration) it shall be presumed that Indemnitee has been successful on the merits or otherwise in such action, suit or proceeding. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion, by clear and convincing evidence.

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     7. Remedies of Indemnitee.

     (a) In the event that (i) a determination is made pursuant to Section 6 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 5 of this Agreement, (iii) no determination of entitlement to indemnification shall have been made pursuant to Section 6(b) of this Agreement within ninety (90) days after receipt by the Company of the request for indemnification, (iv) payment of indemnification is not made pursuant to this Agreement within ten (10) days after receipt by the Company of a written request therefor, or (v) payment of indemnification is not made within ten (10) days after a determination has been made that Indemnitee is entitled to indemnification or such determination is deemed to have been made pursuant to Section 6 of this Agreement, Indemnitee shall be entitled to an adjudication in an appropriate court of the State of Delaware, or in any other court of competent jurisdiction, of his entitlement to such indemnification. Indemnitee shall commence such proceeding seeking an adjudication within one hundred eighty (180) days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 7(a). The Company shall not oppose Indemnitee’s right to seek any such adjudication.

     (b) In the event that a determination shall have been made pursuant to Section 6(b) of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding commenced pursuant to this Section 7 shall be conducted in all respects as a de novo trial, on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination under Section 6(b).

     (c) If a determination shall have been made pursuant to Section 6(b) of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding commenced pursuant to this Section 7, absent a prohibition of such indemnification under applicable law.

     (d) In the event that Indemnitee, pursuant to this Section 7, seeks a judicial adjudication of his rights under, or to recover damages for breach of, this Agreement, or to recover under any directors’ and officers’ liability insurance policies maintained by the Company the Company shall pay on his behalf, in advance, any and all expenses (of the types described in the definition of Expenses in Section 13 of this Agreement) actually and reasonably incurred by him in such judicial adjudication, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advancement of expenses or insurance recovery.

     (e) The Company shall be precluded from asserting in any judicial proceeding commenced pursuant to this Section 7 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court that the Company is bound by all the provisions of this Agreement.

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     8. Non-Exclusivity; Survival of Rights; Insurance; Subrogation.

     (a) The rights of indemnification as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the certificate of incorporation of the Company, the Bylaws, any agreement, a vote of stockholders or a resolution of directors, or otherwise. No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by the Director in Director’s Corporate Status prior to such amendment, alteration or repeal. To the extent that a change in the Law, whether by statute or judicial decision, permits greater indemnification than would be afforded currently under the Bylaws and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy.

     (b) To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees, or agents or fiduciaries of the Company (or related persons thereof) or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person serves at the request of the Company, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any such director, officer, employee or agent (or related person thereof) under such policy or policies.

     (c) In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights.

     (d) The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise.

     9. Exception to Right of Indemnification. Notwithstanding any other provision of this Agreement, Indemnitee shall not be entitled to indemnification under this Agreement with respect to any Proceeding brought by Indemnitee, or any claim therein, unless (a) the bringing of such Proceeding or making of such claim shall have been approved by the Board of Directors of the Company or (b) such Proceeding is being brought by the Indemnitee to assert, interpret or enforce his rights under this Agreement.

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     10. Duration of Agreement. All agreements and obligations of the Company contained herein shall continue during the period Director is an officer or director of the Company (or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise) and shall continue thereafter so long as Indemnitee shall be subject to any Proceeding (or any proceeding commenced under Section 7 hereof) by reason of Director’s Corporate Status, whether or not Director is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification can be provided under this Agreement. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), assigns, spouses, heirs, executors and personal and legal representatives. This Agreement shall continue in effect regardless of whether Director continues to serve as an officer or director of the Company or any other Enterprise at the Company’s request.

     11. Security. To the extent requested by the Indemnitee and approved by the Board of Directors of the Company, the Company may at any time and from time to time provide security to the Indemnitee for the Company’s obligations hereunder through an irrevocable bank line of credit, funded trust or other collateral. Any such security, once provided to the Indemnitee, may not be revoked or released without the prior written consent of the Indemnitee.

     12. Enforcement.

     (a) The Company expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on it hereby in order to induce Director to serve as an officer or director of the Company, and the Company acknowledges that Director is relying upon this Agreement in serving as an officer or director of the Company.

     (b) This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof.

     13. Definitions. For purposes of this Agreement:

     (a) “Corporate Status” describes the status of a person who is or was a director, officer, employee or agent or fiduciary of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the express written request of the Company.

     (b) “Disinterested Director” means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee.

     (c) “Enterprise” shall mean the Company and any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise of which

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Director is or was serving at the express written request of the Company as a director, officer, employee, agent or fiduciary.

     (d) “Expenses” shall include all reasonable attorneys’ fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, participating, or being or preparing to be a witness in a Proceeding.

     (e) “Independent Counsel” means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent: (i) the Company or Indemnitee in any matter material to either such party (other than with respect to matters concerning the Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements), or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term “Independent Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement. The Company agrees to pay the reasonable fees of the Independent Counsel referred to above and to fully indemnify such counsel against any and all Expenses, claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto.

     (f) “Proceeding” includes any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened or completed proceeding, whether brought by or in the right of the Company or otherwise and whether civil, criminal, administrative or investigative, in which Indemnitee was, is or will be involved as a party or otherwise, by reason of the fact that Director is or was a director of the Company, by reason of any action taken by Director or of any inaction on Director’s part while acting as an officer or director of the Company, or by reason of the -fact that Director is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other Enterprise; in each case whether or not Director is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification can be provided under this Agreement; including one pending on or before the date of this Agreement; and excluding one initiated by an Indemnitee pursuant to Section 7 of this Agreement to enforce his rights under this Agreement.

     14. Severability. If any provision or provisions of this Agreement shall be held by a court of competent jurisdiction to be invalid, void, illegal or otherwise unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and shall remain enforceable to the fullest extent permitted by law; and (b) to the fullest extent possible,

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the provisions of this Agreement (including, without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby.

     15. Modification and Waiver. No supplement, modification, termination or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.

     16. Notice By Indemnitee. Indemnitee agrees promptly to notify the Company in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification covered hereunder. The failure to so notify the Company shall not relieve the Company of any obligation which it may have to the Indemnitee under this Agreement or otherwise unless and only to the extent that such failure or delay materially prejudices the Company.

     17. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, or (ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed:

     (a) If to Indemnitee, to the address set forth below Director’s signature hereto.

     (b) If to the Company, to:

Restore Medical, Inc.
2800 Patton Road
St. Paul, MN 55113

or to such other address as may have been furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case may be.

     18. Identical Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement.

     19. Headings. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.

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     20. Governing Law. The parties agree that this Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware without application of the conflict of laws principles thereof.

     21. Gender. Use of the masculine pronoun shall be deemed to include usage of the feminine and gender-neutral pronoun where appropriate.

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written.

COMPANY:
RESTORE MEDICAL INC.
By:
	Name:
	Title:
DIRECTOR:
Name:
Address:

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EX-4.3

Exhibit 4.3

FIRST AMENDMENT
TO
INVESTORS’ RIGHTS AGREEMENT

     This First Amendment (this “Amendment”), dated as of this 17th day of March, 2005, amends that certain Investors’ Rights Agreement dated as of January 28, 2004 (the “Agreement”), by and among Restore Medical Inc., a Delaware corporation (f/k/a Restore Medical, Inc., a Minnesota corporation) (the “Company”), the investors and other stockholders of the Company listed on Schedule A thereto (the “Investors”) and the holders of the Company’s capital stock listed on Schedule B, thereto (the “Founders”).

     WHEREAS, pursuant to Section 9.7 of the Agreement, the parties reserved the right to amend the Agreement; and

     WHEREAS, the undersigned parties to this Amendment include the Company, the holders of at least a majority of Registrable Securities and the holders of at least a majority of the issued and outstanding shares of Series C Preferred Stock, and therefore, as provided in Section 9.7 of the Agreement, this Amendment shall be binding upon all parties to the Agreement; and

     WHEREAS, the undersigned parties to this Amendment desire to make certain modifications to the terms of the right of first offer set forth in Section 2.4(d) of the Agreement; and

     WHEREAS, in connection with a working capital loan facility with Lighthouse Capital Partners V, L.P. (“Lighthouse”), the Company will issue a warrant to Lighthouse to acquire shares of the Company’s Series C-1 Preferred Stock (the “Warrant”); and

     WHEREAS, as a condition to the financing, the Company has agreed to grant Lighthouse registration rights with respect to the shares of the Company’s Common Stock issuable upon conversion of the Preferred Stock subject to the Warrant, and the Investors desire to amend the Agreement to include Lighthouse thereunder.

     NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto hereby agree as follows:

     1. Section 2.4(d) is hereby amended in its entirety to read as follows:

     “(d) The right of first offer in this Section 2.4 shall not be applicable to (i) the issuance or sale of shares of Common Stock (or options therefor) to employees, directors, consultants and other service providers for the primary purpose of soliciting or retaining their services pursuant to plans or agreements approved by the Company’s Board of Directors; (ii) the issuance of securities pursuant to a bona fide, firmly underwritten public offering of shares of Common Stock registered under the Act, (iii) the issuance of securities pursuant to the conversion or exercise of convertible or exercisable securities, (iv) the issuance of securities in connection with a bona fide business acquisition of or by

the Company, whether by merger, consolidation, sale of assets, sale or exchange of stock or otherwise, (v) the issuance and sale of Series C Preferred Stock pursuant to the Series C/C-1 Agreement, or (vi) the issuance of warrants to purchase up to an aggregate of 200,000 shares of Series C-1 Preferred Stock with a per share exercise price equal to at least the fair market value as of the date of issue, as determined in good faith by the corporation’s Board of Directors (and the Common Stock issuable upon conversion thereof) in connection with the incurrence of indebtedness for money borrowed up to an aggregate of $5,000,000 from recognized commercial lending institutions. In addition to the foregoing, the right of first offer in this Section 2.4 shall not be applicable with respect to any Investor in any subsequent offering of Shares if (i) at the time of such offering, the Investor is not an “accredited investor,” as that term is then defined in Rule 501 (a) of the Act and (ii) such offering of Shares is otherwise being offered only to accredited investors.

     2. The Company and the Investors hereby amend the Agreement to include Lighthouse as a “Holder” thereunder and to include the Common Stock issuable upon conversion of the Preferred Stock issuable upon exercise of the Warrant as “Registrable Securities” thereunder.

     3. The definitions of “Holder” and “Registrable Securities” set forth in Section 1.1 of the Agreement shall be amended in their entirety as set forth below:

     The term “Holder” means any person owning or having the right to acquire Registrable Securities or any assignee thereof in accordance with Section 1.11 hereof, and shall include, without limitation, Lighthouse.

     The term “Registrable Securities” means (i) the Common Stock issuable or issued upon conversion of the Preferred Stock (ii) any Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security that is issued as) a dividend or other distribution with respect to, or in exchange for, or in replacement of, the shares referenced in (i) above, excluding in all cases, however, any Registrable Securities sold by a person in a transaction in which his rights under this Section 1 are not assigned, and (iii) all shares of Common Stock of the Company now or hereafter held by Lighthouse, including, without limitation, the shares of Common Stock issued or issuable upon conversion of the shares of Series C-1 Preferred Stock or any other convertible securities now or hereafter held by Lighthouse (including without limitation the Series C-1 Preferred Stock or other securities issued or issuable upon exercise of the Warrant or such other securities now or hereafter held by Lighthouse) or any shares of Common Stock otherwise issuable under warrants held by Lighthouse”.

     4. The following new definition is added to Section 1.1 of the Agreement:

     “Lighthouse” means Lighthouse Capital Partners V, L.P.

     5. For purposes of the Agreement, Lighthouse and any other holder of the Warrant and the Preferred Stock issuable upon exercise thereof shall be deemed to be the record holder or

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holders of the Registrable Securities issuable directly or indirectly upon exercise and conversion thereof.

     6. All notices and other communications under the Agreement shall be made to Lighthouse at the address specified below and thereafter at such other address, notice of which is given in accordance with Section 9.5 of the Agreement:

Lighthouse Capital Partners V, L.P.
500 Drakes Landing Road
Greenbrae, California 94904-3011
Attn: Contract Administration
Phone: (415) 464-5900
Fax: (415) 925-3387

     7. Any capitalized term used herein and not otherwise defined herein shall have the meaning given to such term in the Agreement.

     8. This Amendment constitutes an amendment of the Agreement in conformity with and pursuant to the terms of Section 9.7 of the Agreement. Except as expressly amended herein, all terms set forth in the Agreement shall continue in full force and effect.

     9. The operative terms of this Amendment may be inserted into an Amended and Restated Agreement by the parties and shall have a date as of the day and year first set forth herein.

     10. This Amendment shall be governed by, and construed in accordance with, the laws of the State of Minnesota, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof.

     11. This Amendment may be executed via facsimile in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties.

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

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     IN WITNESS WHEREOF, the undersigned have caused this First Amendment to be duly executed, all as of the date first written above.

COMPANY:
RESTORE MEDICAL INC.
By:	/s/ Susan L. Critzer
	Name: Susan L. Critzer
	Title: Chief Executive Officer

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     Agreed and accepted as of the date first written above:

LIGHTHOUSE CAPITAL PARTNERS V, L.P.
By:	LIGHTHOUSE MANAGEMENT
	PARTNERS V, L.L.C., its general partner

By:	/s/ Thomas Conneely
Name:	Thomas Conneely
Title:	Vice President

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INVESTORS:
MPM BIOVENTURES II, LP
By:	MPM Asset Management II, L.P., its General Partner
By:	MP Asset Management H, LLC, its General Partner

By:	/s/ Luke Evnin
Name:	Luke Evnin
Its:	Manager

MPM	BIOVENTURES II-QP, L.P.
By:	MPM Asset Management II, L.P., its General Partner
By:	MPM Asset Management II LLC, its General Partner

By:	/s/ Luke Evnin
Name:	Luke Evnin
Its:	Manager

MPM BIOVENTURES GMBH & CO
PARALLEL-BETEILIGUNGS KG
By:	MPM Asset Management II, L.P., its General Partner
By:	MPM Asset Management II, LLC, its General Partner

By:	/s/ Luke Evnin
Name:	Luke Evnin
Its:	Manager

MPM ASSET MANAGEMENT INVESTORS 2000B LLC
By:	/s/ Luke Evnin
Name:	Luke Evnin
Its:	Manager

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INVESTORS:
CLS I-IV, LLC
By:	/s/ A. Barr Dolan
Name:	A. Barr Dolan
Its:	Manager
EVENTYR INVESTMENTS, L.P.
By:	/s/ Roe H. Hatlen
Name:	Roe H. Hatlen
Its:	General Partner
VENTURI I, LLC
By:	/s/ Mark B. Knudson
	Mark B. Knudson
	Chairman

/s/ Linda A. Johnson

Linda A. Johnson

/s/ Mark B. Knudson

Mark B. Knudson, Ph.D.

/s/ Timothy I. Maudlin

Timothy I. Maudlin

/s/ Robert S. Nickloff

Robert S. Nickoloff

/s/ Wes Sterman

Wes Sterman

/s/ Brian Truax

Brian Truax

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INVESTORS:
BESSEMER VENTURE PARTNERS VI L.P.
By:	Deer I & Co. LLC, General
	Partner/Managing Member

By:	/s/ J. Edmund Colloton
	Name: J. Edmund Colloton
	Title: Executive Manager

/s/ Christopher Gabrieli

Christopher Gabrieli

TH LEE, PUTNAM INVESTMENT TRUST — TH LEE,

PUTNAM EMERGING OPPORTUNITIES PORTFOLIO

By:	TH Lee, Putnam Capital
	Management, LLC
By:	/s/ Charles A. Ruys de Perez
	Name: Charles A. Ruys de Perez
	Title: Managing Director

GENERAL ELECTRIC PENSION TRUST
By:	GE Asset Management Incorporated,
	its Investment Manager
By:	/s/ Patrick J. McNeela
	Name: Patrick J. McNeela
	Title: Vice President

NGEN ENABLING TECHNOLOGIES FUND, L.P.
By:	/s/ Peter Grubstein
	Name: Peter Grubstein
	Title: Managing Member

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EX-4.4

Exhibit 4.4

March 30, 2005

Ms. Paula J. Norbom
Vice President, Finance
Restore Medical Inc.
2800 Patton Road
St. Paul, MN 55113

     Re:       Delivery of Audited Financial Statements

Dear Ms. Norbom:

     Reference is made to that certain Investors’ Rights Agreement dated as of January 28, 2004, as amended by that certain First Amendment to Investors’ Rights Agreement dated as of March 17, 2005 (as further amended, restated, modified or supplemented from time to time, the “Investors’ Rights Agreement ”) by and among Restore Medical Inc., a Delaware corporation (f/k/a Restore Medical, Inc., a Minnesota corporation) (the “Company”), the investors and other stockholders of the Company listed on Schedule A thereto (the “Investors”) and the holders of the Company’s capital stock listed on Schedule B thereto (the “Founders”). Unless otherwise defined herein, capitalized terms used herein have the respective meanings assigned to them in the Investors’ Rights Agreement.

     Under Section 2.1 (a) of the Investors’ Rights Agreement, the Company agreed to deliver to each Major Investor as soon as practicable, but in any event within 90 days after the end of each fiscal year of the Company, an income statement for such fiscal year, a balance sheet of the Company and statement of stockholders’ equity as of the end of such year, and a statement of cash flows for such year, in each case audited and certified by independent public accountants of nationally recognized standing selected by the Company. The failure by the Company to deliver audited financial statements within 90 days following the end of each fiscal year would constitute a breach of the covenant set forth in Section 2.1 (a) of the Investors’ Rights Agreement.

     Please be advised that the undersigned Investors hereby waive the requirement to deliver audited financial statements to the Major Investors within 90 days following the end of each fiscal year of the Company, including with respect to the fiscal year ended December 31, 2004 and each year thereafter, on the condition that the Company shall deliver to the Major Investors the financial statements required under Section 2.1(a) of the Investors’ Rights Agreement as soon as practicable, and in any event no later than 120 days following the end of each fiscal year of the Company. The foregoing waiver is expressly conditioned on the Company’s compliance with the condition set forth in the preceding sentence.

     This waiver is specific in intent and does not constitute, nor should it be construed as, a waiver of any default, whether retroactively or prospectively, of any other term or provision of the Investors’ Rights Agreement.

     This waiver may be signed by facsimile and in any number of counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. This waiver shall not be effective until signed by the Company, the holders of a majority of the Registrable Securities that are held by Major Investors, and the holders of at least a majority of the issued and outstanding shares of Series C Preferred Stock.

Very truly yours,
MPM BIOVENTURES II, LP
By:	MPM Asset Management II, L.P., its General Partner
By:	MPM Asset Management II, LLC, its General Partner

By:	/s/ Luke Evnin
	Name: Luke Evnin
	Title:

MPM BIOVENTURES II-QP, L.P.
By:	MPM Asset Management II, L.P., its General Partner
By:	MPM Asset Management II, LLC, its General Partner

By:	/s/ Luke Evnin
	Name: Luke Evnin
	Title:

MPM BIOVENTURES GMBH & CO PARALLEL-BETEILIGUNGS KG
By:	MPM Asset Management II, L.P., its General Partner
By:	MPM Asset Management II, LLC, its General Partner

By:	/s/ Luke Evnin
	Name: Luke Evnin
	Title:
MPM ASSET MANAGEMENT INVESTORS 2000B LLC
By:	/s/ Luke Evnin
	Name: Luke Evnin
	Title:

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BESSEMER VENTURE PARTNERS VI L.P.
By:	Deer & Co. LLC, General Partner/Managing Member

By:	/s/ J. Edmund Colloton
	Name: J. Edmund Colloton
	Title: Executive Manager

TH LEE, PUTNAM INVESTMENT TRUST — TH LEE, PUTNAM EMERGING OPPORTUNITIES PORTFOLIO
By:	TH Lee, Putnam Capital Management, LLC

By:	/s/ Robert R. Leveille
	Name: Robert R. Leveille
	Title: Senior Vice President

GENERAL ELECTRIC PENSION TRUST
By:	GE Asset Management Incorporated, its Investment Manager

By:	/s/ Patrick J. McNeela
	Name: Patrick J. McNeela
	Title: Vice President

NGEN ENABLING TECHNOLOGIES FUND, L.P.
By:	/s/ Peter Grubstein
	Name: Peter Grubstein
	Title: Managing Member
STATE STREET BANK AND TRUST COMPANY AS TRUSTEE FOR THE DUPONT PENSION TRUST
By:
	Name:
	Title:

WILTON PRIVATE EQUITY FUND, LLC
By:	Wilton Asset Management, L.L.C., its Manager

By:
	Name:
	Title:

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CLS I-IV, LLC
By:	/s/ A. Barr Dolan
	Name: A. Barr Dolan
	Title:
VENTURI I, LLC
By:	/s/ Mark B. Knudson
	Mark B. Knudson
	Chairman

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EX-10.1

Exhibit 10.1

COMMERCIAL LEASE

This Commercial Lease, executed August 5, 2005, by and between ROSEVILLE PROPERTIES MANAGEMENT COMPANY, a Minnesota corporation, as agent for COMMERS-KLODT III, a Minnesota general partnership (“Landlord”) and RESTORE MEDICAL, INC., a Delaware corporation (“Tenant”).

DEFINITIONS:

“Building” — That certain Building on real property located in the City of Roseville, County of Ramsey, State of Minnesota, containing approximately 55,950 square feet and commonly addressed as 2800 Patton Road, Roseville, Minnesota (See Exhibit A).

“Demised Premises” - That certain portion of the Building consisting of approximately 37,997 square feet, as measured from the outside walls of the Demised Premises to the center of the partition wall (see Exhibit B). The Demised Premises includes a non-exclusive easement for access to Common Areas as defined below, and all licenses and easements appurtenant to the Demised Premises.

“Common Areas” — The term “Common Area” refers to all areas used non-exclusively by Tenant and other Tenants in the Building, including, but not limited to, corridors, lavatories, driveways, truck docks, parking lots and landscaped areas. Common Areas are available to Tenant and its employees, agents, customers, and invitees for reasonable use in common with other lessees, their employees, agents, customers and invitees, subject to reasonable rules and regulations set forth by Landlord.

In consideration for the Base Rent, Additional Rent and any additional compensation(s) outlined in this Lease, Landlord leases to Tenant the Demised Premises under the following conditions:

1.0 TERM OF LEASE, CONSTRUCTION AND POSSESSION:

Landlord gives and Tenant takes possession of Demised Premises for the term of five (5) years beginning October 1, 2005 (the “Commencement Date”), and ending September 30, 2010 (the “Expiration Date”), unless terminated earlier as conditioned.

Landlord shall, at Landlord’s sole expense, perform the work identified on the plans and specifications found on Exhibit C attached hereto and incorporated by reference herein. Except as stated on said Exhibit C, Tenant accepts the Demised Premises in an “as is” condition.

Unless otherwise stated, Landlord shall deliver possession of the Demised Premises to Tenant in the condition required by this Lease on or before the Commencement Date, but delivery of possession prior to or later than such Commencement Date shall not affect the expiration date of this Lease. The rentals herein reserved shall commence on the Commencement Date. Any occupancy by Tenant prior to the beginning commences all mutual terms and obligations of this lease. Landlord shall have no responsibility or liability for loss or damage to fixtures, facilities or equipment installed on or left on the Demised Premises. If Demised Premises are not ready

for occupancy by Commencement Date and possession is later than Commencement Date, rent shall begin on date of possession.

2.0 BASE RENT:

Landlord is due and Tenant shall pay Landlord, Base Rent as scheduled:

Months 1 through 12	$30,080.96 per month
Months 13 through 24	$30,397.60 per month
Months 25 through 36	$30,714.24 per month
Months 37 through 48	$31,030.88 per month
Months 49 through 60	$31,347.83 per month

3.0 ADDITIONAL RENT:

Tenant shall reimburse to Landlord monthly, throughout the Term of Lease and any extension of this Lease, the following Additional Rent:

Common Area Maintenance (CAM) expenses, Real Estate Taxes/Assessments, any Utilities not paid directly by Tenant, and any Miscellaneous Charges or Reimbursements.

Landlord may estimate annual CAM and Real Estate Taxes/Assessments expenses as a basis for reimbursement for any calendar year and invoice in monthly installments (see Exhibit D). During the Term of Lease and/or any extension of this Lease, Landlord, within 120 days of each calendar year end, will provide to Tenant a written statement of actual CAM and Real Estate Taxes/Assessments expenses. If Tenant has underpaid its share of any of these expenses, at Landlord’s election, Tenant shall reimburse Landlord as invoiced. If Tenant has overpaid its share of any of these expenses, Landlord will credit such amount against the most current monthly invoice. If the Term of Lease is less than one calendar year any reimbursement(s) will be prorated based on time of occupancy for such year. Upon prior written notice to Landlord, Tenant shall have the opportunity to audit the actual CAM and Real Estate Taxes/Assessments expenses statement for a period of 90 days upon receipt of said statement. Tenant waives its right to audit the actual CAM and Real Estate Taxes/Assessments expenses upon its failure to exercise such right during said 90 day period.

Tenant’s share of all Additional Rent will be determined by the Tenant’s leased share (Demised Premises) of the total building square footage along with Tenant’s proportionate share of any rooms considered common area to the building (expenses will be calculated on an annual basis divided by building square footage to obtain an annual cost per square foot.)

Landlord, at its election, may invoice for reimbursement(s) of any Utility usage not paid directly by Tenant.

3.1 COMMON AREA MAINTENANCE EXPENSES (CAM):

Except as otherwise provided herein, “Common Area Maintenance” (CAM) shall include, but not be limited to, maintenance, repair, and care of all lighting, plumbing, roofs, parking surfaces, landscaped areas, signs, snow removal, non-structural repair and

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maintenance of the exterior of the Building, HVAC systems servicing the office space portions of the Demised Premises, costs of equipment purchased and used for such purposes, cleaning and cleaning supplies for the common areas, insurance premiums, management fee based upon gross collected rents, wages and fringe benefits of personnel employed for such work. Additionally, during the term of this Lease, any extension and/or renewal of this Lease, CAM expenses shall include the annual cost or portion allocable to the Building of any capital improvements made to the Building by Landlord which result in a reduction of expenses or required under any governmental law or regulation that was not applicable at the time it was constructed. Landlord may elect to amortize such costs over the useful life of the improvement and at eight percent (8%) interest per annum. Notwithstanding anything to the contrary in this Lease, the HVAC systems servicing the “clean room” and lab areas of the Demised Premises shall be excluded from CAM and all costs associated with maintenance, repair, and replacement of such HVAC systems shall be borne solely by Tenant. Landlord shall conduct a building inspection and repair any leaks in the roof, at Landlord’s sole expense, prior to the Commencement Date.

3.2 REAL ESTATE TAXES AND ASSESSMENTS:

Real Estate Taxes and Assessments shall mean all Real Estate Taxes, all assessments and any taxes in lieu thereof payable on each calendar year, which may be levied upon or assessed against the Building. Any tax year commencing during any lease year shall be deemed to correspond to such lease year. In the event the taxing authorities additionally include in such real estate and assessments the value of any improvements made by Tenant, or of machinery, equipment, fixtures, inventory or other personal property or assets of Tenant, then Tenant shall pay all the taxes attributable to such items. Upon Tenant’s request, Landlord will furnish a copy of the Real Estate Tax statement. All special assessments will be spread over the longest term available to Landlord by the assessing authority and at the lowest interest rate available from the assessing authority.

3.3 UTILITIES

Landlord shall provide mains and conduits to supply water, gas, electricity and sanitary sewage to the Building. Tenant shall pay, when due, all charges for sewer and water usage, garbage/refuse disposal/removal and recycling, electricity, gas and other fuels, telephone/communication services and/or other utility services or energy source furnished to the Demised Premises during the term of this Lease, or any extension and/or renewal of this Lease. If Tenant’s usage of any utility is deemed disproportionate as determined by Landlord, Landlord may elect to submeter and bill Tenant accordingly. Landlord accepts no responsibility for any disruption of any utility service due to accident, natural causes or circumstances beyond Landlord’s control and/or the utility provider’s inability to deliver said service.

3.4 MISCELLANEOUS CHARGES AND REIMBURSEMENTS

Miscellaneous Charges and Reimbursements shall include, without limitation, reconciliation of Real Estate Taxes/Assessments, CAM and Utilities, service requests

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facilitated by Landlord at the direction of Tenant, Tenant improvement reimbursements, notes due Landlord and any other miscellaneous charge due Landlord.

4.0 COVENANT TO PAY RENT:

The covenants of Tenant to pay the Base Rent and the Additional Rent are each independent of any other covenant, condition, provision or agreement contained in this Lease. All rents are due and payable as invoiced on the first of the each month during the Term of Lease and any extensions of the Lease to Landlord at:

2575 North Fairview Avenue, Suite 250
Roseville, Minnesota 55113

or such other address as Landlord shall designate to Lessee in writing.

5.0 OVERDUE PAYMENTS:

All base rent and additional rent under this Lease and any extension shall be due on the first of each calendar month, unless otherwise specified. Service charges shall be imposed after the tenth of each calendar month in the amount five percent (5%) of the outstanding balance due.

6.0 USE:

The Demised Premises shall be used and occupied by Tenant solely for general office purposes as well as the development, manufacture, marketing and sale of medical devices and/or such other general business purposes which may otherwise be consistent and/or compatible with the business of Tenant and its approved subtenants, and Tenant agrees that such uses shall be in compliance with all applicable laws, ordinances and governmental regulations affecting the Building and the Demised Premises. Tenant shall immediately discontinue any use of the Demised Premises which is not in compliance with any applicable laws, ordinances or governmental regulations. The Demised Premises shall not be used in such manner that, in accordance with any requirement of law or of any public authority, Landlord shall be obliged on account of the purpose or manner of said use to make any addition or alteration to or in the Building. The Demised Premises shall not be used in any manner which will increase the rates required to be paid for public utility or for fire and extended coverage insurance covering the Premises. Tenant shall occupy the Demised Premises, conduct its business and control its agents, employees, invitees and visitors in such a way as is lawful, and reputable and will not permit or create any nuisance, noise, odor, or otherwise interfere with, annoy or disturb any other tenant in the Building in its normal business operations or Landlord in its management of the Building. Tenant’s use of the Demised Premises shall conform to all the Landlord’s rules and regulations relating to the use of the Building. Outside storage on the Building of any type of equipment, property or materials owned or used on the Demised Premises by Tenant or its customers and suppliers shall not be permitted, unless otherwise stated.

7.0 SECURITY AND DAMAGE DEPOSIT:

Tenant has deposited with Landlord the sum of Four Thousand Six Hundred Forty and 60/100 Dollars ($4,640.60), receipt of which is acknowledged hereby by Landlord. Landlord shall hold

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deposit, without liability for interest, as a security and damage deposit for the faithful performance by Tenant during the Term of Lease or any extension. Prior to the time when Tenant shall be entitled to the return of this security deposit, Landlord may co-mingle such deposit with Landlord’s own funds and to use such security deposit for such purpose as Landlord may determine. In the event of the failure of Tenant to keep and perform any of the terms, covenants and conditions of the term of lease or any extension of this lease, then Landlord, either with or without terminating this Lease, may (but shall not be required to) apply such portion of said deposit as may be necessary to compensate or repay Landlord for all losses or damages sustained by Landlord due to such breach on the part of Tenant. Landlord may apply said deposit without limitation to overdue and unpaid rent, any other sum payable by Tenant to Landlord pursuant to the provisions of this Lease, damages or deficiencies in the reletting of Demised Premises, and reasonable attorney’s fees incurred by Landlord. Should the entire deposit or any portion thereof, be appropriated and applied by Landlord, in accordance with the provisions of this paragraph, Tenant upon written demand by Landlord, shall remit to Landlord a sufficient amount of cash to restore said security deposit to the original sum deposited. Tenant’s failure to remit such security deposit within five (5) days after receipt of such demand shall constitute a breach of this Lease. Upon the termination of this or any extension, Landlord shall return to Tenant the deposit or any remaining balance. Tenant shall have no right to anticipate return of said deposit by withholding any amount required to be paid pursuant to the provisions of this Lease.

In the event Landlord shall sell the Building, convey or dispose of its interest in this Lease, Landlord may assign said security deposit or any balance to Landlord’s assignee, whereupon Landlord shall be released from all liability for the return or repayment of such security deposit and Tenant shall look solely to the assignee for the return and repayment of security deposit. Said security deposit shall not be assigned or encumbered by Tenant without the written consent of Landlord, and any assignment or encumbrance without such consent shall not bind Landlord. In the event of any rightful and permitted assignment of this Lease by Landlord, said security deposit shall be deemed to be held by Landlord as a deposit made by the assignee, and Landlord shall have no further liability with respect to the return of said security deposit to the Tenant.

8.0 CARE AND REPAIR OF DEMISED PREMISES:

Tenant shall, at all times throughout the Term of this Lease and any extensions, and at its sole expense, keep and maintain the Demised Premises in a clean, safe, sanitary and reasonable condition, reasonable wear and tear excepted and taking into account that as of the date of this Lease, the Demised Premises was delivered to Tenant in an “as is” condition except for those improvements specified on Exhibit C, and in compliance with all applicable laws, codes, ordinances, rules and regulations. Tenant’s obligations hereunder shall include, without limitation, the maintenance, repair, replacement, if necessary, of all “non-load bearing” interior walls, partitions, doors and windows, including the regular painting thereof, all exterior entrances, windows, doors and docks, the replacement of all broken glass, of all fixture/equipment/component of heating, ventilation, air conditioning (HVAC) systems associated with Tenant’s clean room and lab areas (with the HVAC systems servicing the office space portion of the Demised Premises being a CAM expense, the proportionate share of which CAM expense shall be borne by Tenant), all lighting systems, plumbing systems and electrical systems; provided, however, prior to the commencement of this Lease, Landlord agrees to

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perform an inspection of the Demised Premises and repair and/or replace, respectively, any defects to the roof and any defective rooftop heating and cooling units. In the event that an HVAC rooftop unit or ceiling hung unit heater requires replacement subsequent to the commencement of this Lease, the cost of such replacement shall be shared between Landlord and Tenant, Tenant’s share to be based on a ratio of the time of occupancy to the nearest one-half year to the estimated useful life of the unit, unless caused by the misuse or neglect of Tenant. Such estimations are fifteen (15) years for a roof top unit and ten (10) years for a ceiling hung unit heater under normal conditions. With the exception of HVAC equipment, when used in this provision, the term “repairs” shall include replacements, and all such repairs or replacements made by Tenant shall be of equal quality to the “as is” condition of the original equipment or work to the Demised Premises as of the Commencement Date. Tenant shall use reasonable efforts to keep and maintain all portions of the Demised Premises and the sidewalk and areas adjoining the same in a clean and orderly condition, free of accumulation of dirt, rubbish, snow and ice, regardless of any CAM performed by Landlord. Tenant shall make reasonable efforts to maintain a minimum temperature in the Demised Premises of 40 degrees during the Term of this Lease; provided, however, Tenant shall not be held responsible for failure to maintain such minimum temperature of the Demised Premises as a result of any disruption in utility service or an accident, Act of God, or other circumstances beyond Tenant’s control that prevents the continuity of the utility service necessary to maintain such minimum temperature.

If Tenant fails, refuses or neglects to maintain or repair the Demised Premises as required in this Lease after notice shall have been given Tenant, in accordance with Article 17.0 of this Lease, Landlord may make such repairs or replacements without liability to Landlord for any loss or damage that may accrue to Tenant’s merchandise, fixtures or other property or to Tenant’s business by reason thereof, and upon completion thereof, Tenant shall pay to Landlord all costs plus 15% for overhead incurred by Landlord in making such repairs or replacements.

Landlord shall repair, at its expense, the structural portions of the Building, unless such repairs are required as a result of the acts of Tenant, its employs, agents, assigns or invitees, the costs thereof shall be borne by Tenant and payable by Tenant to Landlord.

Landlord shall be responsible for all outside maintenance of the Demised Premises, including grounds and parking areas. All such maintenance which is the responsibility of the Landlord shall be provided as reasonably necessary to the comfortable use and occupancy of Demised Premises during business hours, except Sundays and holidays, upon the condition that the Landlord shall not be liable for damages for its performance due to causes beyond its control.

9.0 HAZARDOUS MATERIALS:

Tenant shall not (either with or without negligence) cause or permit the escape, disposal or release of any biologically or chemically active or other hazardous substances, or materials, except as to such disposal or release that is done in compliance with applicable laws and regulations. Tenant shall not allow the storage or use of such substances or materials in any manner not sanctioned by law or by the customary standards prevailing in the industry for the storage and use of such substances or materials, nor allow to be brought into the Project any such materials or substances except in the ordinary course of Tenant’s business, and then only after written notice is given to Landlord of the identity of such substances or materials. Without

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limitation, hazardous substances and materials shall include those described in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601 et seq., the Resource Conservation and Recovery Act, as amended, 42 U.S.C. Section 6901 et seq., any applicable state or local laws and the regulations adopted under these acts. If any lender or governmental agency shall ever require to ascertain whether or not there has been any release of hazardous materials, and Landlord’s reasonable investigation of the same concludes that Tenant has breached its obligations under this Article 9.0, then, to the extent of such breach, the reasonable costs thereof shall be reimbursed by Tenant to Landlord upon demand as additional charges if such requirement applies to the Premises. In addition, Tenant shall execute affidavits, representations and the like from time to time at Landlord’s request concerning Tenant’s best knowledge and belief regarding the presence of hazardous substances or materials on the Premises. In all events, Tenant shall indemnify Landlord from any release of hazardous materials on the Premises occurring while Tenant is in possession or elsewhere if caused by Tenant or persons acting under Tenant. The within covenants shall survive the expiration or earlier termination of the lease term.

10.0 PUBLIC LIABILITY INSURANCE:

Tenant shall during the term hereof keep in full force and effect at its own expense a policy or policies of public liability insurance with respect to the Demised Premises and the business of Tenant, on terms and with companies approved in writing by Landlord, in which both Tenant and Landlord shall be covered by being named as insured parties under reasonable limits of liability not less than: $1,000,000 for injury/death to any one person; $2,000,000 for injury/death to more than one person, and $1,000,000 with respect to damage to property. Such policy or policies shall provide that ten (10) days written notice must be given to Landlord prior to cancellation thereof. Tenant shall furnish evidence satisfactory to Landlord at the time this Lease is executed that such coverage is in full force and effect.

11.0 SIGNAGE AND DISPLAYS:

Upon occupancy, building exterior signage, building directories and/or pylon signage shall be approved, installed and provided for by Landlord in compliance with city ordinances and building signage criteria. Any changes, modifications and/or maintenance of initial signage shall be at Tenant’s sole cost and expense with approval of Landlord. Additional signage, lettering, picture, notice or advertisement installed on or in any part of the Premises and visible from the exterior of the Building, or visible from the exterior of the Demised Premises, shall be approved by Landlord at Tenant’s sole cost and expense. Said signs are to be maintained by Landlord at Tenant’s expense. Landlord may remove any unauthorized signs without any liability to Landlord and may charge the expense incurred by such removal to Tenant. Notwithstanding anything to the contrary in this Section 11.0, Landlord agrees to include the names of Tenant and its approved subtenants on the monument signage adjacent to the Building.

12.0 ALTERATIONS, INSTALLATION, FIXTURES:

After completion of Landlord’s Work (as set forth on Exhibit C) and unless otherwise stated, Tenant shall not make any alterations, additions or improvements in or to the Demised Premises or add, disturb or in any way change any plumbing or wiring without the prior written consent of

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the Landlord, which consent will not be unreasonably withheld. In the event alterations are required by any governmental agency by reason of the use and occupancy of the Demised Premises by Tenant, Tenant shall make such alterations at its own cost and expense after first obtaining Landlord’s written approval of plans and specifications and furnishing such indemnification as Landlord may reasonably require against liens, costs, damages and expenses arising out of such alterations. Tenant shall warrant to Landlord that all such alterations, additions, or improvements shall be in strict compliance with all relevant laws, ordinances, governmental regulations and insurance requirements. Construction of such alterations or additions shall commence only upon Tenant obtaining and exhibiting to Landlord the requisite approvals, licenses and permits and indemnification against liens. Unless otherwise agreed to, all alterations, installations, physical additions or improvements to the Demised Premises made by Tenant shall at once become the property of Landlord and shall be surrendered to Landlord upon the termination of this Lease.

13.0 ACCESS TO DEMISED PREMISES:

Tenant agrees to permit Landlord and the authorized representatives of Landlord to enter the Demised Premises at all reasonable times and upon reasonable prior notice during usual business hours (except in the event of an emergency) for the purpose of inspecting the same and making any necessary repairs to the Demised Premises and performing any work therein that may be necessary to comply with any laws, ordinances, rules, regulations or requirements of any public authority or of the Board of Fire Underwriters or any similar body or that Landlord may deem necessary to prevent waste or deterioration in connection with the Demised Premises. Nothing herein shall imply any duty upon the part of Landlord to do any such work which, under any provision of this Lease, Tenant is required to perform and the performance thereof by Landlord shall not constitute a waiver of the Tenant’s default to perform the same. Landlord may, during the progress of any work in the Demised Premises or Building, keep and store upon the Demised Premises or Building all necessary materials, tools, and equipment. Landlord shall not in any event be liable for inconvenience, annoyance, disturbance, loss of business, or other damage of the Tenant, nor shall Tenant’s lease obligations be affected by reason of making repairs or the performance of any work, including materials handling into or through the Demised Premises or Building.

Landlord reserves the right to enter upon the Demised Premises (a) at any time in the event of an emergency and (b) at reasonable hours to exhibit the Demised Premises to prospective purchasers or others; and to exhibit the Demised Premises to prospective tenants and to display “For Rent” or similar signs on windows or doors in the Demised Premises during the last one hundred twenty (120) days of the term of this Lease, all without hindrance by Tenant.

14.0 REMOVAL OF FIXTURES:

Notwithstanding anything contained in Article 12.0, 18.0, or elsewhere in this Lease, if Landlord’s consent to an alteration, installation or fixture is conditioned upon Tenant removing the same upon the expiration or earlier termination of this Lease, then Tenant will promptly remove at the sole cost and expense of Tenant that alteration, installation or fixture made by Tenant simultaneously with vacating the Demised Premises and Tenant will promptly restore

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said Demised Premises to the condition that existed immediately prior to said fixtures, equipment and alterations having been made.

15.0 ASSIGNMENT OR SUBLETTING:

Tenant agrees to use and occupy the Demised Premises throughout the entire term hereof for the purpose herein specified and for no other purposes, in the manner and to substantially the extent now intended, and, except for any sublease of a portion of the Demised Premises to Enteromedics or Integ/Lifescan, Tenant agrees not to transfer or assign this Lease or sublet said Demised Premises, or any part thereof, whether by voluntary act, operation of law, or otherwise, without obtaining the prior consent of Landlord in each instance, which consent will not be unreasonably withheld. Tenant shall seek such consent of Landlord by a written request therefor, setting forth such information as Landlord may deem necessary. Consent by Landlord to any assignment of this Lease or to any subletting of the Demised Premises shall not be a waiver of Landlord’s right under this Article as to any subsequent assignment or subletting. Landlord’s rights to assign this Lease are and shall remain unqualified. No such assignment or subleasing shall relieve the Tenant from any of Tenant’s obligations in this Lease contained, nor shall any assignment or sublease or other transfer of this Lease be effective unless the assignee, subtenant or transferee shall at the time of such assignment, sublease or transfer, assume in writing for the benefit of Landlord, its successors or assigns, all of the terms, covenants, and conditions of this Lease thereafter to be performed by Landlord and shall agree in writing to be bound thereby. Except for any sublease to Enteromedics or Integ/Lifescan (for which Tenant is not responsible to share with Landlord any rents received from said subtenants), should Tenant sublease in accordance with the terms of this Lease, fifty percent (50%) of any increase in rental received by Tenant over the per square foot rental rate which is being paid by Tenant shall be forwarded to and retained by Landlord, which increase shall be in addition to the Base Rent and Additional Rent due Landlord under this Lease.

16.0 SUCCESSORS AND ASSIGNS:

The terms, covenants and conditions hereof shall be binding upon and inure to the successors and assigns of the parties hereto.

17.0 NOTICES:

Any notice required or permitted under this Lease shall be deemed sufficiently given or secured if sent by registered or certified return receipt mail to Tenant                                                                                                                                                          a nd to Landlord at the address then fixed for the payment of rent as provided in Article 4.0 of this Lease and either party may by like written notice at any time designate a different address to which notices shall subsequently by sent or rent to be paid.

18.0 SURRENDER:

On the Expiration Date or upon the termination hereof upon a day other than the Expiration Date, Tenant shall peaceably surrender the Demised Premises in good order, condition and repair (reasonable wear and tear only excepted); warehouse area in broomclean condition; office/restroom area vacuumed and cleaned. Furthermore, Tenant shall be responsible to return

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to its original condition (reasonable wear and tear only excepted) the “controlled environment area” (the “Clean Room”) situated in a portion of the Demised Premises in the event that Landlord advises Tenant, in writing, to do so within one hundred twenty (120) days after the Expiration Date or earlier termination of this Lease. Landlord will attempt to, but is not obligated to, re-let the Demised Premises to a tenant who would accept the Clean Room in its “as is” condition and, if Landlord is successful in re-letting the Demised Premises to a tenant who will use the Clean Room in its “as is” condition, Tenant shall be absolved from its obligation to restore the Clean Room portion of the Demised Premises to its original condition. On or before the Expiration Date or upon termination of this Lease on a day other than the Expiration Date, Tenant shall, at its expense, remove all trade fixtures, personal property and equipment and signs from the Demised Premises and any property not removed shall be deemed to have been abandoned. Any damage caused in the removal of such items shall be repaired by Tenant and at its expense. All alterations, additions, improvements and fixtures (other than trade fixtures) which shall have been made or installed by Landlord or Tenant upon the Demised Premises and all floor covering so installed shall remain upon and be surrendered with the Demised Premises as a part thereof, without disturbance, molestation or injury, and without charge, at the expiration or termination of this Lease. If the Demised Premises are not surrendered on the Expiration Date or the date of termination, Tenant shall indemnify Landlord against loss or liability, claims, without limitation, made by any succeeding Tenant founded on such delay. Tenant shall promptly surrender all keys for the Demised Premises to Landlord at the place then fixed for payment of rent and shall inform Landlord of combinations of any locks and safes on the Demised Premises.

19.0 HOLDING OVER:

In the event of a holding over by Tenant after expiration or termination of this Lease without the consent in writing of Landlord, Tenant shall be deemed a Tenant at sufferance and shall pay rent for such occupancy at the rate of one and one-half times the last-current aggregate Base Rent and Additional Rent, prorated for the entire holding over period, plus all attorney’s fees and expenses incurred by Landlord in enforcing its rights hereunder, plus any other damages occasioned by such holding over. Except as otherwise agreed, any holding over with the written consent of Landlord shall constitute Tenant a month-to-month lease.

20.0 ABANDONMENT:

In the event Tenant shall remove its fixtures, equipment or machinery or shall vacate the Demised Premises or any part thereof prior to the Expiration Date of this Lease, or shall discontinue or suspend the operation of its business conducted on the Demised Premises for a period of more than thirty (30) consecutive days (except during any time when the Demised Premises may be rendered untenable by reason of fire or other casualty), and is simultaneously delinquent in its monetary obligations under the Lease, then in any such event Tenant shall be in default under the terms of this Lease. Tenant shall maintain a minimum temperature in the Demised Premises of 40 degrees during the Lease Term.

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21.0 DEFAULT OF TENANT:

a.

In the event of any failure of Tenant to pay any rental due hereunder within ten (10) days after the same becomes due, or any failure to perform any other terms, conditions or covenants of this Lease to be observed or performed by Tenant for more than ten (10) days after written notice of such failure shall have been given to Tenant, or if Tenant or an agent of Tenant shall falsify any report required to be furnished to Landlord pursuant to the terms of this Lease, or if Tenant or any guarantor of this Lease shall become bankrupt or insolvent, or file any debtor proceedings or any person shall take or have against Tenant or any guarantor of this Lease in any court pursuant to any statute either of the United States or of any state a petition in bankruptcy or insolvency or for reorganization or for the appointment of a receiver or trustee of all or a portion of Tenant’s or any such guarantor’s property, or if Tenant or any such guarantor’s property, or if Tenant or any such guarantor makes an assignment for the benefit of creditors, or petitions for or enters into an arrangement with its creditors, or if Tenant shall abandon the Demised Premises or suffer this Lease to be taken under any writ of execution, then in any such event Tenant shall be in default hereunder, and Landlord, in addition to other rights of remedies it may have, shall have the immediate right of re-entry and may remove all persons and property from the Demised Premises and such property may be removed and stored in a public warehouse or elsewhere at the cost of, and for the account of Tenant, without being guilty of trespass, or becoming liable for any loss or damage which may be occasioned thereby.

b.

Should Landlord elect to re-enter the Demised Premises, as herein provided, or should it take possession of the Demised Premises pursuant to legal proceedings or pursuant to any notice provided for by law, it may either terminate this Lease or it may from time to time, without terminating this Lease, make such alterations and repairs as may be necessary in order to relet the Demised Premises, and relet the Demised Premises or any part thereof for such term or terms (which may be for a term extending beyond the term of this Lease) and at such rental or rentals and upon such other terms and conditions as Landlord in its sole discretion may deem advisable. Upon each such subletting all rentals received by the Landlord from such reletting shall be applied first to the payment of any indebtedness other than rent due hereunder from Tenant to Landlord; second, to the payment of any costs and expenses of such reletting, including brokerage fees and attorney’s fees and costs of such alterations and repairs; third, to the payment of the rent due and unpaid hereunder, and the residue, if any shall be held by Landlord and applied in payment of future rent as the same may become due and payable hereunder. If such rentals received from such reletting during any month be less than that to be paid during month by Tenant hereunder, Tenant, upon demand, shall pay any such deficiency to Landlord. No such re-entry or taking possession of the Demised Premises by Landlord shall be construed as an election on it’s part to terminate this Lease unless a written notice of such intention be given to Tenant or unless the termination thereof be decreed by a court of competent jurisdiction. Notwithstanding any such reletting without termination, Landlord may at any

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	time after such reentry and reletting elect to terminate this Lease for such previous breach. Should Landlord at any time terminate this Lease for any such breach, in addition to any other remedies it may have, it may recover from Tenant all damages it may incur by reason of such breach, including the cost of recovering the Demised Premises, attorney’s fees, and costs, the unamortized portion of any leasehold improvements made by Landlord for Tenant and including the worth at the time of such termination of the excess, if any, of the amount of rent and charges equivalent to rent reserved in this Lease for the remainder of the stated term over the then reasonable rental value of the Demised Premises for the remainder of the stated term, all of which amounts shall be immediately due and payable from Tenant to Landlord. Landlord shall also have the right to accelerate the entire indebtedness (including the amount of Base Rent and reasonably estimated Additional Rent reserved in this Lease for the remainder of the Term of Lease), reduce the same to present value using a discount rate of one hundred basis points below the “prime” or “reference” rate then announced at Wells Fargo Bank, N.A., Minneapolis office, or its successors and assigns (the “Prime Rate”), and recover a judgment from Tenant in that amount.
c.	Landlord may, at its option, instead of exercising any other rights or remedies available to it in this Lease or otherwise by law, statute or equity, spend such money as is reasonably necessary to cure any default of Tenant herein and the amount so spent, and costs incurred, including attorneys’ fees in curing such default, shall be paid by Tenant, as additional rent, upon demand.
d.	In the event suit shall be brought for recovery of possession of the Demised Premises, for the recovery of rent or any other amount due under the provisions of this Lease, or because of the breach of any other covenant herein contained on the part of the Tenant to be kept or performed, and a breach shall be established, Tenant shall pay to Landlord all expenses incurred therefor, including attorney’s fees and costs, together with interest on all such expenses at the rate of ten percent (10%) per annum from the date of such breach of the covenants of this Lease.
e.	Tenant waives any demand for possession of the Demised Premises, and any demand for payment of rent and any notice of intent to re-enter the Demised Premises, or of intent to terminate this Lease, other than the notices above provided in this Article, and any other notice or demand prescribed by any applicable statutes or laws.
f.	No remedy herein or elsewhere in this Lease or otherwise by law, statute or equity, conferred upon or reserved to Landlord or Tenant shall be exclusive of any other remedy, but shall be cumulative, and may be exercised from time to time and as often as the occasion may arise.
g.	For purposes hereof, a “Landlord Default” exists if Landlord fails to perform any of its obligations under this Lease within 30 days after receiving notice from Tenant specifying the nature and extent of such failure; provided, however, if the obligation is not reasonably curable within such 30 day period, the time for will

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be extended so long as Landlord continues to use reasonable efforts to effect a cure. If a Landlord Default has occurred, then, in addition to all rights, powers or remedies permitted by law or in equity, Tenant may cure such Landlord Default and charge the cost thereof to Landlord, or sue for specific performance or sue for damages. Landlord is liable for, and shall pay to Tenant within 30 days after receiving Tenant’s invoice, all reasonable attorneys’ fees and other costs incurred by Tenant as a result of a Landlord Default.

If Landlord fails to pay within such 30 day period the amount due, Tenant has the right to offset such amounts against the next installments of Rent due hereunder.

22.0 EMINENT DOMAIN:

In the event of any eminent domain of condemnation proceeding or private sale in lieu thereof in respect to the Building during the term thereof, the following provisions shall apply:

a.	If the whole of the Building shall be acquired or condemned by eminent domain for any public or quasipublic purpose, the term of this lease shall cease and terminate as of the date possession shall be taken in such proceedings and all rentals shall be paid up to that date.
b.	If any part constituting less than the whole of the Building shall be acquired or condemned as aforesaid, and in the event that such partial taking or condemnation shall materially affect the Demised Premises so as to render the Demises Premises unsuitable for the business of the Tenant, in the opinion of Landlord, then the term of this Lease shall cease and terminate as of the date possession shall be taken by the condemning authority and rent shall be paid to the date of such termination.
	In the event of a partial taking or condemnation of the Building which shall not materially affect the Demised Premises so as to render the Demised Premises unsuitable for the business of the Tenant, in the opinion of the Landlord, this Lease shall continue in full force and effect with a proportionate abatement of the Base Rent and Additional Rent based on the portion, if any of the Demised Premises taken. Landlord reserves the right, at its option, to restore the building and the Demised Premises to substantially the same condition as they were prior to such condemnation. In such event, Landlord shall give written notice to Tenant, within 30 days following the date possession shall be taken by the condemning authority, of Landlord’s intention to restore. Upon Landlord’s notice of election to restore, Landlord shall commence restoration and shall restore the Building and the Demised Premises with reasonable promptness, subject to delays beyond Landlord’s control and delays in the making of condemnation or sale proceeds adjustments by Landlord; and Tenant shall have no right to terminate this Lease except as herein provided. Upon completion of such restoration, the rent shall be adjusted based upon the portion, if any, of the Demised Premises restored.

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c.

In the event of any condemnation or taking as aforesaid, whether whole or partial, the Tenant shall not be entitled to any part of the award paid for such condemnation and Landlord is to receive the full amount of such award, the Tenant hereby expressly waiving any right to claim to any part thereof.

d.

Although all damages in the event of any condemnation shall belong to the Landlord whether such damages are awarded as compensation for diminution in value of the leasehold or to the fee of the Demised Premises, Tenant shall have the right to claim and recover from the condemning authority, but not from Landlord, such compensation as may be separately awarded or recoverable by Tenant in Tenant’s own right on account of any and all damage to Tenant’s business by reason of the condemnation and for or on account of any cost or loss to which Tenant might be put in removing Tenant’s merchandise, furniture, fixtures, leasehold improvements and equipment. However, Tenant shall have no claim against Landlord or make any claim with the condemning authority for the loss of its leasehold estate, any unexpired term or loss of any possible renewal or extension of said lease or loss of any possible value of said lease, any unexpired term, renewal or extension of said lease.

23.0 RULES AND REGULATIONS:

Tenant shall observe and comply with such further reasonable rules and regulations as Landlord may prescribe, on written notice to Tenant for the safety, care and cleanliness of the Building.

24.0 DAMAGE OR DESTRUCTION:

In the event of any damage or destruction to the Premises by fire or other cause during the term hereof, the following provisions shall apply:

a.	If the Building is damaged by fire or any other cause to such extent that the cost of restoration, as reasonably estimated by Landlord, will equal or exceed thirty percent (30%) of the replacement value of the Building (exclusive of foundations) just prior to the occurrence of the damage, then Landlord may, not later than the sixtieth (60th) day following the damage, give Tenant written notice of Landlord’s election to terminate this Lease.
b.	If the cost of restoration as estimated by Landlord will equal or exceed fifty percent (50%) of said replacement value of the Building and if the Demised Premises are not suitable as a result of said damage for the purposes for which they are demised hereunder, in the reasonable opinion of Tenant, then Tenant may, no later than the sixtieth (60th) day following the damage, give Landlord a written notice of election to terminate this Lease.
c.	If the cost of restoration as estimated by Landlord shall amount to less than thirty percent (30%) of said replacement value of the Building, or if, despite the cost, Landlord does not elect to terminate this Lease, Landlord shall restore the Building and the Demised Premises with reasonable promptness, subject to delays beyond Landlord’s control and delays in the mating of insurance adjustments by

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	Landlord; and Tenant shall have no right to terminate this Lease except as herein provided. Landlord shall not be responsible for restoring or repairing leasehold improvements of the Tenant.
d.	In the event of either of the elections to terminate, this Lease shall be deemed to terminate on the date of the receipt of the notice of election and all rentals shall be paid up to that date. Tenant shall have no claim against Landlord for the value of any unexpired term of this Lease.
e.	In any case where damage to the Building shall materially affect the Demised Premises so as to render them unsuitable in whole or in part for the purposes for which they are demised hereunder, then, unless such destruction was wholly or partially caused by the negligence or breach of the terms of this Lease by Tenant, its employees, contractors or licensees, a portion of the rent based upon the amount of the extent to which the Demised Premises are rendered unsuitable shall be abated until repaired or restored. If the destruction or damage was wholly or partially caused by negligence or breach of the terms of this Lease by Tenant as aforesaid and if Landlord shall elect to rebuild, the rent shall not abate and the Tenant shall remain liable for the same.

25.0 CASUALTY INSURANCE:

a.	Landlord shall at all times during the term of this Lease, at its expense, maintain a policy or policies of insurance with premiums paid in advance issued by an insurance company licensed to do business in the State of Minnesota insuring the Building against loss or damage by fire, explosion or other insurable hazards and contingencies for the full replacement value, provided that Landlord shall not be obligated to insure any furniture, equipment, machinery, goods or supplies not covered by this Lease which Tenant may bring upon the Demised Premises or any additional improvements which Tenant may construct or install on the Demised Premises.
b.	Tenant shall not carry any stock of goods or do anything in or about the Demised Premises which will in any way impair or invalidate the obligation of the insurer under any policy of insurance required by this Lease.
c.	Landlord hereby waives and releases all claims, liabilities and causes of action against Tenant and its agents, servants and employees for loss of damage to, or destruction of, the Building or any portion thereof, including the buildings and other improvements situated thereon, resulting from fire, explosion or the other perils included in standard extended coverage insurance, whether caused by the negligence of any of said persons or otherwise. Likewise, Tenant hereby waives and releases all claims, liabilities and causes of action against Landlord and its agents, servants and employees for loss of damage to, or destruction of, any of the improvements, fixtures, equipment, supplies, merchandise and other property, whether that of Tenant or of others in, upon or about the Premises resulting from fire, explosion or the other perils included in standard coverage insurance,

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whether caused by the negligence of any of said persons or otherwise. The waiver shall remain in force whether or not the Lessee’s insurer shall consent thereto.

d.

In the event that the use of the Demised Premises by Tenant increases the premium rate for insurance carried by Landlord on the improvements of which the Demised Premises are a part, Tenant shall pay Landlord, upon demand, the amount of such premium increase. If Tenant installs any electrical equipment that overloads the power lines to the building or its wiring, Tenant shall, at its own expense, make whatever changes are necessary to comply with the requirements of the insurance underwriter, insurance rating bureau and governmental authorities having jurisdiction.

26.0 COVENANTS TO HOLD HARMLESS:

Unless the liability for damage or loss is caused by the negligence of Landlord, its agents or employees, Tenant shall hold harmless Landlord from any liability for damages to any person or property in or upon the Demised Premises and the Building, including the person and property of Tenant and its employees and all persons in the Building at its or their invitation or sufferance, and from all damages resulting from Tenant’s failure to perform the covenants of this Lease. All property kept, maintained or stored on the Demised Premises shall be so kept, maintained or stored at the sole risk of Tenant. Tenant agrees to pay all sums of money in respect of any labor, service, materials, supplies or equipment furnished or alleged to have been furnished to Tenant in or about the Demised Premises, and not furnished on order of Landlord, which may be secured by any mechanic’s materialmen’s or other lien to be discharged at the time performance of any obligation secured thereby matures, provided that Tenant may contest such lien, but if such lien is reduced to final judgment and if such judgment or process thereon is not stayed, or if stayed and said stay expires, then and in each such event, Tenant shall forthwith pay and discharge said judgment. Landlord shall have the right to post and maintain on the Demised Premises, notices of nonresponsibility under the laws of the State of Minnesota.

Except to the extent that the liability for damage or loss is caused by the negligence of Tenant, its agents or employees, Landlord shall, subject to Section 25(c), hold harmless Tenant from any liability for damages to any person or property in or upon the Building, including the person and property of Landlord and its employees and all persons in the Building at its or their invitation or sufferance, and from all damages to the extent resulting from Landlord’s failure to perform the covenants of this Lease.

27.0 NON-LIABILITY:

Subject to the terms and conditions of Article 26.0 hereof, Landlord shall not be liable for any damage to property of Tenant or of others located on the Premises, nor for the loss or damage to any property of Tenant or of others by theft or otherwise. Landlord shall not be liable for any injury or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water, rain or snow or leaks from any part of the Premises or from the pipes, appliances, or plumbing works or from the roof, street or subsurface or from any other place or by dampness or by any other cause of whatsoever nature. Landlord shall not be liable for any

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such damage caused by other Tenants or persons in the Premises, occupants or adjacent property, of the buildings, or the public or caused by operations in construction of any private, public or quasi-public work. Landlord shall not be liable for any such damage caused by other tenants or persons in the Premises, occupants of adjacent property, of the buildings, of the public or caused by operations.

28.0 SUBORDINATION:

This Lease shall be subordinated to any mortgage that may now exist or that may hereafter be placed upon the Demised Premises and to any and all advances made thereunder, and to the interest upon the indebtedness evidenced by such mortgages, and to all renewals, replacements and extensions thereof; provided, however, that Tenant’s possession of the Demised Premises will not be disturbed as long as Tenant is not in default beyond applicable cure periods under this Lease. In the event of execution by Landlord after the date of this Lease of any such mortgage, renewal, replacement or extension, Tenant agrees to execute a subordination agreement with the holder thereof which agreement shall provide that:

a.	Such holder shall not disturb the possession and other rights of Tenant under this Lease so long as Tenant is not in default hereunder.
b.	In the event of acquisition of title to the Demised Premises by such holder, such holder shall accept the Tenant as Tenant of the Demised Premises under the terms and conditions of this Lease and shall perform all the obligations of Landlord hereunder, and
c.	The Tenant shall recognize such holder as Landlord hereunder
d.	Tenant shall, upon receipt of a request from Landlord therefor, execute and deliver to Landlord or to any proposed holder of a mortgage or trust deed or to any proposed purchaser of the Premises an Estoppel Letter.

29.0 ATTORNMENT:

In the event of a sale or assignment of Landlord’s interest, in the Building in which the Demised Premises are located, or this Lease, or if the Building comes into custody or possession of a mortgagee or any other party whether because of a mortgage foreclosure, or otherwise, Tenant shall attorn to such assignee or other party and recognize such party as Landlord hereunder; provided, however, Tenant’s peaceable possession will not be disturbed so long as Tenant faithfully performs its obligations under this Lease. Tenant shall execute, on demand, any attornment agreement required by any such party to be executed, containing such provisions as such party may require. Landlord shall have no further obligations under this Lease after any such assignment.

30.0 NOVATION IN THE EVENT OF SALE:

In the event of the sale of the Demised Premises, Landlord shall be and hereby is relieved of all of the covenants and obligations created hereby accruing from and after the date of sale, and such sale shall result automatically in the purchaser assuming and agreeing to carry out all the

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covenants and obligations of Landlord herein. Notwithstanding the foregoing provisions of this Section 30.0, Landlord, in the event of a sale of the Demised Premises, shall cause to be included in this agreement of sale and purchase a covenant whereby the purchaser of the Demised Premises assumes and agrees to carry out all of the covenants and obligations of Landlord herein.

The Tenant agrees at any time and from time to time upon not less than ten (10) days prior written request by the Landlord to execute, acknowledge and deliver to the Landlord a statement in writing certifying that this Lease is unmodified and in full force and effect as modified and stating the modifications, and the dates to which the basic rent and other charges have been paid in advance, if any, it being intended that any such statement delivered pursuant to this paragraph may be relied upon by any prospective purchaser of the fee or mortgagee or assignee or any mortgage upon the fee of the Demised Premises.

31.0 QUIET ENJOYMENT:

Landlord warrants that it has full right to execute and to perform this Lease and to grant the estate demised, and that Tenant, upon payment of the rents and other amounts due and the performance of all the terms, conditions, covenants and agreements on Tenant’s part to be observed and performed under this Lease, may peaceably and quietly enjoy the Demised Premises for the business uses permitted hereunder, subject, nevertheless, to the terms and conditions of this Lease.

32.0 RECORDING:

Tenant shall not record this Lease without the written consent of Landlord. However, upon the request of either party hereto, the other party shall join in the execution of the Memorandum lease for the purposes of recordation. Said Memorandum lease shall describe the parties, the Demised Premises and the term of the Lease and shall incorporate this Lease by reference. This Article 32.0 shall not be construed to limit Landlord’s right to file this Lease.

33.0 CONSENTS BY LESSOR:

Whenever provision is made under this Lease for Tenant securing the consent or approval by Landlord, such consent or approval shall only be in writing.

34.0 INTENT OF PARTIES:

Except as otherwise provided herein, the Tenant covenants and agrees that if it shall any time fail to pay any cost or expense required to be paid by it, or fail to take out, pay for, maintain or deliver any of the insurance policies above required, or fails to make any other payment or perform any other act on its part to be made or performed as in this Lease provided, then the Landlord may, but shall not be obligated so to do, and without notice to or demand upon the Tenant and without waiving or releasing the Tenant from any obligations of the Tenant in this Lease contained, pay any such cost or expense, effect any such insurance coverage and pay premiums therefor, and may make any other payment or perform any other act on the part of the Tenant to be made and performed as in this Lease provided, in such manner and to such extent as the Landlord may deem desirable, and in exercising any such right, to also pay all necessary and incidental costs and expenses, employ counsel and incur and pay reasonable attorney’s fees. All

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sums so paid by Landlord and all necessary and incidental costs and expenses in connection with the performance of any such act by the Landlord, together with interest thereon at the rate of fourteen percent (14%) per annum from the date of making such expenditures, by Landlord, shall be deemed additional rent hereunder, and shall be payable to Landlord on demand. Tenant covenants to pay any such sum or sums with interest as aforesaid and the Landlord shall have the same rights and remedies in the event of the non-payment thereof by Tenant as in the case of default by Tenant in the payment of the Base Rent payable under this Lease.

35.0 GENERAL:

a.	The Lease does not create the relationship of principal and agent or of partnership or of joint venture or of any association between Landlord and Tenant, the sole relationship between the parties hereto being that of Landlord and Tenant.
b.	No waiver of any default of Tenant hereunder shall be implied from any omission by Landlord to take any action on account of such default if such default persists or is repeated, and no express waiver shall affect any default other than the default specified in the express waiver and that only for the time and to the extent therein stated. One or more waivers by Landlord shall not then be construed as a waiver of a subsequent breach of the same covenant, term or condition. The consent or approval by Landlord of any act by Tenant requiring Landlord’s consent or approval shall not waive or render unnecessary Landlord’s consent to or approval of any subsequent similar act by Tenant. No action required or permitted to be taken by or on behalf of Landlord under the terms or provisions of this Lease shall be deemed to constitute an eviction or disturbance of Tenant’s possession of the Demised Premises. All preliminary negotiations are merged into and incorporated in this Lease. The laws of the State of Minnesota shall govern the validity, performance and enforcement of this Lease.
c.	This Lease and the exhibits, if any, attached hereto and forming a part hereof, constitute the entire agreement between Landlord and Tenant affecting the Demised Premises and there are no other agreements, either oral or written, between them other than herein set forth. No subsequent alteration, amendment, change or addition to this Lease shall be binding upon Landlord or Tenant unless reduced to writing and executed in the same form and manner in which this Lease is executed.
d.	If any agreement, covenant or condition of this Lease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such agreement, covenant or condition to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each agreement, covenant or condition of this Lease shall be valid and be enforced to the fullest extent permitted by law.

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e.	The captions are inserted only as a matter of convenience and for reference, and in no way define, limit or describe the scope of this Lease nor the intent or any provision thereof.
f.	Submission of this instrument to Tenant or proposed Tenant or his agents or attorneys for examination, review, consideration or signature does not constitute or imply an offer to lease, reservation of space, or option to lease, and this instrument shall have no binding legal effect until execution hereof by both Landlord/Owner and Tenant or its agents.

36.0 RENEWAL OPTION.

Provided the Lease is in full force and effect and Tenant is not in default beyond any applicable cure period under any of the other terms and conditions of the Lease, at the time of either notification of renewal or commencement of the Renewal Term (as that term is hereinafter defined), then Tenant shall have a one (1) time option to renew the Lease for a term of 60 months (the “Renewal Term”), on the same terms and conditions set forth in the Lease, except as modified by the terms, covenants and conditions as set forth below:

a.	If Tenant elects to exercise said option, then Tenant shall provide Landlord with written notice no later than the date which is six (6) months prior to the expiration of the initial Term of this Lease, time being of the essence. If Tenant fails to timely provide such notice, Tenant shall have no right or additional right to extend or renew the initial Term of this Lease. The notice shall be given in the manner provided in the Lease for the giving of notices to Landlord.
b.	Within sixty (60) days of Landlord’s receiving Tenant’s written notice of Tenant’s intention to renew this Lease, Landlord shall notify Tenant of Landlord’s determination of the “Fair Rental Value” (as defined below) rental rate to be applicable during the Renewal Term. If Tenant disagrees with Landlord’s determination of the Fair Rental Value rate to be applicable during the Renewal Term, it shall so notify Landlord and the parties agree to negotiate in good faith to arrive upon the Fair Rental Value rate to be applicable during the Renewal Term. If the parties cannot agree within thirty (30) days of Landlord’s initial notification of its determination of the Fair Rental Value rate, then Tenant’s right to renew shall lapse and this entire Article shall become null, void, and of no further force and effect.
c.	For purposes of this Article 36, “Fair Rental Value” means the annual Base Rent, as determined by Landlord, that a tenant would pay to a landlord under a net lease containing other terms and conditions substantially as set forth herein with respect to comparable premises in a comparable building in the general geographic area as the Building is located where both the landlord and tenant are willing and able to enter into such a lease transaction but neither would be under any compulsion to do so, and taking into account all relevant facts and circumstances concerning the Building, the parties and the relevant market.

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d. The option set forth in this Article is not transferable, the parties hereto acknowledge and agree that the option to renew as set forth in this Article shall be “personal” to the Tenant executing this Lease, and that in no event will any assignee or sublessee have any rights to exercise any rights set forth in this Article.

IN WITNESS WHEREOF, the Landlord and the Tenant have executed this lease in form and manner sufficient to bind them at law, as of the day and year first above written.

LANDLORD:	TENANT:
ROSEVILLE PROPERTIES MANAGEMENT	RESTORE MEDICAL, INC.
COMPANY, as agent for COMMERS-
KLODT III

/s/ Daniel P. Commers	/s/ J. Robert Paulson, Jr.
Signature	Signature
Daniel P. Commers	J. Robert Paulson, Jr.
Name (print)	Name (print)
President	President and Chief Executive Officer
Title	Title
August 8, 2005	August 8, 2005
Date Signed	Date Signed

[Exhibits Not Filed]

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EX-10.2

Exhibit 10.2

LOAN AND SECURITY AGREEMENT

THIS LOAN AND SECURITY AGREEMENT No. 4541 (this “Agreement”) is entered into as of March 23, 2005, by and between LIGHTHOUSE CAPITAL PARTNERS V, L.P. (“Lender”) and RESTORE MEDICAL INC., a Delaware corporation (“Borrower”) and sets forth the terms and conditions upon which Lender will lend and Borrower will repay money. In consideration of the mutual covenants herein contained, the parties agree as follows:

1.    DEFINITIONS AND CONSTRUCTION

1.1 Definitions. Initially capitalized terms used and not otherwise defined herein are defined in the California Uniform Commercial Code (“UCC”).

“ACH” means the Automated Clearing House electronic funds transfer system.

“Advance” means a Loan advanced by Lender to Borrower hereunder.

“Basic Rate” means a variable per annum rate of interest equal to the Index plus the Interest Margin which shall be subject to upward adjustment as provided in the Loan Agreement. On and after the Funding Date the Basic Rate shall be fixed and not subject to any further adjustments. Notwithstanding the foregoing, in no event shall the Basic Rate be less than 8%.

“Borrower’s Books” means all of Borrower’s books and records, including records concerning Collateral, Borrower’s assets, liabilities, business operations or financial condition, on any media, and the equipment containing such information.

“Collateral” means: (i) all property of Borrower in which Lender or an affiliate of Lender has a security interest as described on Exhibit A attached hereto; and (ii) all products and proceeds of the foregoing, including proceeds of insurance and proceeds of proceeds.

“Commitment” means $5,000,000. “Commitment Fee” means $10,000.

“Commitment Termination Date” means the earliest to occur of (i) at the election of the Lender the earlier of (a) December 31, 2005 if Borrower has not borrowed at least $2,000,000 by such date or (b) July 1, 2006; (ii) any Default or Event of Default, or (iii) in Lender’s sole judgment, any adverse change in the composition of Borrower’s Board of Directors (defined as the continued representation of MPM Capital) after the date hereof.

“Control Agreement” means an agreement substantially in the form of Exhibit I or otherwise acceptable to Lender.

“Default” means any event that with the passing of time or the giving of notice or both would become an Event of Default.

“Default Rate” means the lesser of 15% per annum or the highest rate permitted by applicable law.

“Disclosure Schedule” means the schedule attached as Schedule I hereto.

“Event of Default” is defined in Section 8.

“Funding Date” means any date on which an Advance is made to or on account of Borrower hereunder.

“Indebtedness” means (i) all indebtedness for borrowed money or the deferred purchase of property or services, (ii) all obligations evidenced by notes, bonds, debentures or similar instruments, (iii) all capital lease obligations, and (iv) all contingent obligations, including guaranties and obligations of reimbursement or respecting letters of credit.

“Incumbency Certificate” means the document in the form of Exhibit E.

“Index” means the prevailing variable Prime Rate of annual interest as quoted from time to time in the western edition of the Wall Street Journal.

“Interest Margin” means 3% per annum.

“Lender’s Expenses” means all reasonable costs or expenses (including reasonable attorneys’ fees and expenses) incurred in connection with the preparation, negotiation, modification, administration, or enforcement of the Loan or Loan Documents, or the exercise or preservation of any rights or remedies by Lender, whether or not suit is brought; provided however, that Lender’s Expenses for the preparation and negotiation of the initial set of Loan Documents shall not exceed $10,000, in each case to be evidenced by a reasonably detailed invoice setting forth such actual costs and expenses, including reasonable attorneys’ fees and expenses. Lender will apply deposits received before the date hereof, if any, towards Lender’s Expenses.

“Lien” means any lien, security interest, pledge, bailment, lease, mortgage, hypothecation, conditional sales and title retention agreement, charge, claim, or other encumbrance.

“Liquidation Event” means any of: (i) a merger of Borrower with another entity whereby the shareholders of Borrower owning at least 50% of the outstanding voting securities of Borrower immediately prior to such merger own less than 50% of the outstanding voting securities of Borrower immediately after such merger; (ii) the sale (in one or a series of related transactions) of all or substantially all of Borrower’s assets; or (iii) any transaction (or series of related transactions) whereby the shareholders of Borrower immediately prior to such transaction(s) own less than 50% of the outstanding voting securities of Borrower immediately after such transaction(s).

“Loan” means all of the Advances, however evidenced, and all other amounts due or to become due hereunder.

“Loan Commencement Date” means July 1, 2006.

“Loan Documents” means, collectively, this Agreement, the Warrant, the Notes and all other documents, instruments and agreements entered into between Borrower and Lender in connection with the Loan, all as amended or extended from time to time.

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“Negative Pledge Agreement” means an agreement in the form of Exhibit H.

“Note” means a Secured Promissory Note in the form of Exhibit B.

“Notice of Borrowing” means the form attached as Exhibit D.

“Obligations” means all Loans, debt, principal, interest, fees, charges, Lender’s Expenses and other amounts, obligations, covenants, and duties owing by Borrower to Lender of any kind or description (whether pursuant to the Loan Documents or otherwise (with the exception of the Warrant), and whether or not for the payment of money), whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including any of the same obtained by Lender by assignment or otherwise, and all amounts Borrower is required to pay or reimburse by the Loan Documents, by law, or otherwise.

“Permitted Indebtedness” means: (i) the Loan; (ii) unsecured trade debt incurred in the ordinary course of Borrower’s business and (iii) Indebtedness secured by clause (ii)and (x) of Permitted Liens.

“Permitted Liens” means: (i) Liens in favor of Lender; (ii) Liens disclosed in the Disclosure Schedule; (iii) inchoate Liens for taxes, assessments or other governmental charges or levies not yet due or Liens for taxes, assessments or governmental changes or levies being contested in good faith and by appropriate proceedings; (iv) Liens in respect of property or assets of Borrower imposed by law which were incurred in the ordinary course of business, such as carriers’, warehousemen’s, and mechanics’ Liens, statutory landlord’s Liens, and other similar Liens arising and paid in the ordinary course of business; (v) Liens incurred or deposits made in the ordinary course of business in connection with workers’ compensation, unemployment insurance and other types of social security or to secure the performance of tenders, statutory obligations, surety bonds, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations incurred in the ordinary course of business; (vi) licenses granted to other persons in the ordinary course of Borrower’s business not interfering in any material respect with the business of Borrower; (vii) licenses, leases or subleases granted in the ordinary course of Borrower’s business to other persons not interfering in any material respect with the business of Borrower; (viii) reasonable and ordinary course banker’s Liens, rights of setoff and similar Liens to secure account fees, returned items, brokers fees, and brokerage claims for purchased securities incurred on deposits or assets on deposit in the ordinary course of business and Liens Lender has permitted pursuant to the terms of the applicable Control Agreement; (ix) Liens to secure payment of worker’s compensation, employment insurance, old age pensions or other social security obligations of Borrower on which Borrower is current and are in the ordinary course of its business; provided none of the same diminish or impair Lender’s rights and remedies respecting the Collateral and (x) Liens upon or in any equipment acquired or held by Borrower (including existing liens on equipment disclosed in the Disclosure Schedule) to secure the purchase price of such equipment or indebtedness incurred solely for the purposes of financing the acquisition of such equipment, in an amount not to exceed $500,000, provided that (a) any Liens for such Indebtedness are confined to the equipment financed, and (b) such Indebtedness is made on commercially reasonable terms.

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“Regulated Substance” means any substance, material or waste the use, generation, handling, storage, treatment or disposal of which is regulated by any local or state government authority, including any of the same designated by any authority as hazardous, genetic, cloning, fetal, or embryonic.

“Responsible Officer” means each person as authorized by the board of directors of Borrower as set forth on the Incumbency Certificate.

“Term” means the period from and after the date hereof until the full, final and indefeasible payment and performance of all Obligations.

“Warrant” means the Warrant in favor of Lender and its affiliates to purchase securities of Borrower substantially in the form of Exhibit C.

1.2 Interpretation. References to “Articles,” “Sections,” “Exhibits,” and “Schedules” are to articles, sections, exhibits and schedules herein and hereto unless otherwise indicated. “Hereof,” “herein” and “hereunder” refer to this Agreement as a whole. “Including” is not limiting. All accounting and financial computations shall be computed in accordance with generally accepted accounting principles consistently applied (“GAAP”). “Or” is not necessarily exclusive. All interest computation interest shall be based on a 360-day year and actual days elapsed.

2.    THE LOANS

2.1 Commitment. Subject to the terms hereof, Lender will make Advances to Borrower up to the principal amount of the Commitment, before the Commitment Termination Date. Notwithstanding anything in the Loan Documents to the contrary, Lender’s obligation to make any Advances or to lend the undisbursed portion of the Commitment shall terminate on the Commitment Termination Date. Repaid principal of the Advances may not be re-borrowed.

2.2 The Advances. A Note setting forth the specific terms of repayment will evidence each Advance. No Advance will be made for less than $500,000, unless less than $500,000 remains available under the Commitment for borrowing. Absence of a Note evidencing any portion of the Loan shall not impair Borrower’s obligation to repay it to Lender.

2.3 Terms of Payment, Repayment.

     (a) Repayment. Borrower shall repay the principal and pay interest on each Advance on the terms set forth in the applicable Note. Amounts not paid when due hereunder or under the Note shall bear interest at the Default Rate. If a court of competent jurisdiction determines that Lender has received payments that, if interest, would exceed the maximum lawfully permitted, Lender will instead apply such money to fees and expenses and then to early prepayment of principal.

     (b) ACH. All payments due to Lender must be, at Lender’s option, paid to Lender in cash or through ACH. Borrower shall execute and deliver the ACH Authorization Form substantially in the form of Exhibit E. If the ACH payment arrangement is terminated for any reason, Borrower shall make all payments due to Lender at Lender’s address specified in Section 11.

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     (c) Default Rate. While an Event of Default has occurred and is continuing, interest on the Loan shall be increased to the Default Rate. Lender’s failure to charge or accrue interest at the Default Rate during the existence of an Event of Default shall not be deemed a waiver by Lender of its right or claim thereto.

     (d) Date. Whenever any payment due under the Loan Documents is due on a day other than a business day, such payment shall be made on the next succeeding business day, and such extension of time shall be included in the computation of interest or fees, as the case may be.

2.4 Fees. Borrower shall pay to Lender the following:

     (a) Commitment Fee. The Commitment Fee, which has been previously paid by Borrower, and shall be applied by Lender first to Lender’s Expenses and thereafter to other Obligations;

     (b) Late Fee. On demand, a late charge on any sums due hereunder that are not paid when due, in an amount equal to 2% of the past due amount, payable on demand.

     (c) Lender’s Expenses. When requested, all Lender’s Expenses. Lender’s Expenses not paid when due shall bear interest as principal at the Default Rate.

3.    CONDITIONS OF ADVANCES; PROCEDURE FOR REQUESTING ADVANCES

3.1 Conditions Precedent to any and all Advances. The obligation of Lender to make any Advances is subject to each and every of the following conditions precedent in form and substance satisfactory to Lender in its sole discretion: (i) this Agreement, a Note evidencing the Advance, the Warrant, and all other UCC financing statements, and other documents required or as specified herein have been duly authorized, executed and delivered; (ii) no Default or Event of Default has occurred and is continuing; (iii) delivery of a notice of Borrowing with respect to the proposed Advance; (iv) Lender’s security interests in the Collateral are valid and first priority, except for Permitted Liens: and (v) all such other items as Lender may reasonably deem necessary or appropriate have been delivered or satisfied. The extension of an Advance prior to the receipt by Lender of any of the foregoing shall not constitute a waiver by Lender of Borrower’s obligation to deliver such item.

3.2 Procedure for Making Advances. For any Advance, Borrower shall provide Lender an irrevocable Notice of Borrowing at least 7 business days prior to the desired Funding Date and Lender shall only be required to make Advances hereunder based upon written requests which comply with the terms and exhibits of this Loan Agreement (as the same may be amended from time to time), and which are submitted and signed by a Responsible Officer. Borrower shall execute and deliver to Lender a Note and such other documents and instruments as Lender may reasonably require for each Advance made.

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4.    CREATION OF SECURITY INTEREST

4.1 Grant of Security Interest. Borrower grants to Lender a valid, first priority, continuing security interest in all present and future Collateral in order to secure prompt, full, faithful and timely payment and performance of all Obligations.

4.2 Inspections. Lender shall have the right upon reasonable prior notice to inspect Borrower’s Books, including computer files, and to make copies, and in its reasonable discretion to test, inspect and appraise the Collateral, in order to verify any matter relating to Borrower or the Collateral.

4.3 Authorization to File Financing Statements. Borrower irrevocably authorizes Lender at any time and from time to time to file in any appropriate jurisdiction any financing statements and amendments that: (i) name Collateral as collateral thereunder, regardless of whether any particular Collateral falls within the scope of the UCC; (ii) contain any other information required by the UCC for sufficiency or filing office acceptance, including organization identification numbers; and (iii) contain such language as Lender determines helpful in protecting or preserving rights against third parties. Borrower ratifies any such filings made prior to the date hereof.

4.4 Control Agreement Action. Lender shall not exercise exclusive control pursuant to the terms of a Control Agreement unless an Event of Default has occurred and is continuing.

5.    REPRESENTATIONS AND WARRANTIES

Borrower represents, warrants and covenants as follows:

5.1 Due Organization and Qualification. Borrower is a corporation duly formed, existing and in good standing under the laws of its state of incorporation and qualified and licensed to do business in, and is in good standing in, any state in which the conduct of its business or its ownership of property requires that it be so qualified or in which the Collateral is located and where the failure to be so qualified could reasonably be expected to have an adverse effect on the Borrower.

5.2 Authority. Borrower has all corporate power and authority, and has taken all actions, and has obtained all third party consents necessary to execute, deliver, and perform the Loan Documents.

5.3 Disclosure Schedule. All information on the Disclosure Schedule is true, correct and complete except for de minimus errors.

5.4 Authorization; Enforceability. The execution and delivery hereof, the granting of the security interest in the Collateral, the incurring of the Obligations, the execution and delivery of all Loan Documents and the consummation of the transactions herein and therein contemplated have been duly authorized by all necessary action by Borrower. The Loan Documents constitute legal, valid and binding obligations of Borrower, enforceable in accordance with their terms, except as enforceability may be limited by bankruptcy or similar laws relating to enforcement of creditors’ rights generally.

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5.5 Name and Location. Except as set forth on the Disclosure Schedule, Borrower has not done business under any name other than that specified on the signature page hereof. The chief executive office, principal place of business, and the place where Borrower maintains its records concerning the Collateral is set forth in Section 11. The Collateral is presently located at the address(es) set forth in Section 1 l and on the Disclosure Schedule.

5.6 Litigation. As of the date hereof or the date of the applicable Notice of Borrowing, as the Disclosure Schedule is supplemented by Borrower, all actions or proceedings pending by or against Borrower before any court or administrative agency are set forth on the Disclosure Schedule.

5.7 Financial Statements. All financial statements fairly represent the financial condition of the Borrower. All statements respecting Collateral that have been or may hereafter be delivered by Borrower to Lender are true, complete and correct in all material respects for the periods indicated.

5.8 Solvency. Borrower is solvent and able to pay its debts (including trade debts) as they come due.

5.9 Taxes. Borrower has filed and will file all required tax returns, and has paid and will pay all taxes it owes (except for taxes being contested in good faith and for which adequate reserves are kept) other than where the failure to comply would not reasonably be expected to have an adverse effect on Borrower.

5.10 Rights; Title to Assets. Borrower possesses and owns all necessary assets, rights, trademarks, trade names, copyrights, patents, patent rights, franchises and licenses which it needs to conduct of its business as now operated or proposed to be operated. Borrower has good title to its assets, free and clear of any Liens, except for Permitted Liens.

5.11 Full Disclosure. No written representation, warranty or other statement made by Borrower in any Loan Document, certificate or statement furnished to Lender contains any untrue statement of a material fact when taken as a whole or omits to state a material fact necessary in order to make the statements contained in such certificates or statements not misleading.

5.12 Regulated Substances. Borrower complies and will comply in all material respects with all laws respecting Regulated Substances.

5.13 Reaffirmation. Each Notice of Borrowing will constitute (i) a warranty and representation in favor of Lender that there does not exist any Default and (ii) a reaffirmation as of the date thereof of all of the representations and warranties contained in this Agreement and the Loan Documents except for representations and warranties which are made to be effective as of a specific date, which are no longer true solely as a result of the passage of time, and for which exceptions thereto which have been disclosed in writing to the Lender and which have been approved in writing by the Lender, other than supplements to the Disclosure Schedule contemplated under Section 5.6, for which no approval by Lender is required.

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6.    AFFIRMATIVE COVENANTS

Borrower covenants and agrees that it shall do all of the following until the Obligations are paid in full and the Commitment Termination Date has passed:

6.1 Good Standing and Compliance. Borrower shall maintain all governmental licenses, rights and agreements necessary for its operations or business and comply in all material respects with all statutes, laws, ordinances and government rules and regulations to which it is subject.

6.2 Financial Statements, Reports, Certificates. Borrower shall deliver to Lender: (i) as soon as prepared, and no later than 45 days after the end of each calendar month, a balance sheet, income statement and cash flow statement covering Borrower’s operations during such period; (ii) as soon as prepared, but no later than 90 days after the end of the fiscal year, or such other time period as approved by the Borrower’s Board of Directors, audited financial statements prepared in accordance with GAAP, together with an opinion that such financial statements fairly present Borrower’s financial condition by an independent public accounting firm reasonably acceptable to Lender; (iii) immediately upon notice thereof, a report of any legal or administrative action pending or threatened against Borrower which an adverse determination could reasonably be expected to result in liability to Borrower in excess of $50,000; and (iv) such other financial information as Lender may reasonably request from time to time. Financial statements delivered pursuant to subsections (i) and (ii) above shall be accompanied by a certificate signed by a Responsible Officer (each an “Officer’s Certificate”) in the form of Exhibit F.

6.3 Notice of Defaults. Within 5 days after the occurrence of any Default or Event of Default, an Officer’s Certificate setting forth the facts relating to or giving rise thereto, and the Borrower’s proposed action with respect thereto.

6.4 Use; Maintenance. Borrower, at its expense, shall (i) maintain the Collateral in good condition, reasonable wear and tear excepted, and will comply in all material respects with all laws, rules and regulations regarding use and operation of the Collateral and (ii) repair or replace any lost or damaged Collateral; provided that, Borrower may sell inventory in the ordinary course of business and may dispose of worn out or obsolete equipment.

6.5 Insurance. Borrower, at its own expense, shall maintain insurance in amounts and coverages reasonably satisfactory to Lender. Each insurance shall: (i) name Lender loss payee or additional insured, as appropriate, and (ii) require the insurer to give Lender at least 30 days prior written notice of cancellation. Borrower shall furnish all certificates of insurance reasonably required by lender.

6.6 Loss Proceeds. So long as no Event of Default has occurred and is continuing, any proceeds of insurance on or condemnation of Collateral shall, at Borrower’s election and so long as Lender’s security interest in such proceeds or repaired or replacement Collateral remains first priority, be used either to repair or replace such Collateral or otherwise applied to the purchase or acquisition of property useful to Borrower’s business.

6.7 Further Assurances. At any time and from time to time, Borrower shall execute and deliver such further instruments and take such further action as Lender may reasonably request to

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effect the intent and purposes hereof, to perfect and continue perfected and of first priority Lender’s security interests in the Collateral, and to effect and maintain ACH payment arrangements.

7.    NEGATIVE COVENANTS

Borrower will not do any of the following until the Obligations are paid in full and the Commitment Termination Date has passed:

7.1 Location of Collateral. Change its chief executive office or principal place of business or remove, except in the ordinary course of Borrower’s business, the Collateral (other than inventory sold in the ordinary course of business) or Borrower’s Books from the premises listed in Section I I without giving written notice to Lender within 30 days of such change or removal.

7.2 Extraordinary Transactions. Enter into any sale, lease, license or other disposition of its assets, other than such transactions entered into in the ordinary course of Borrower’s business.

7.3 Restructure. Make any change in Borrower’s financial structure or business operations which results in a change of control of Borrower; cause a Liquidation Event; or suspend operation of Borrower’s business.

7.4 Liens. Create, incur, assume or suffer to exist any Lien of any kind with respect to any of its property, whether now owned or hereafter acquired, except for Permitted Liens.

7.5 Indebtedness. Create, incur, assume or suffer to exist any Indebtedness, other than Permitted Indebtedness or cause or suffer any Subsidiary to create, incur, assume or suffer to exist any Indebtedness, other than Permitted Indebtedness.

7.6 Distributions. Pay any dividends or distributions, or redeem or purchase, any capital stock, except (i) repurchases of capital stock from departing employees or directors, under repurchase agreements approved by the Borrower’s Board of Directors or (ii) in connection with stock options and warrants exchanged or exercised in connection with issuances of Borrower’s capital stock

7.7 Transactions with Affiliates. Directly or indirectly enter into any transaction with any affiliate which is on terms less favorable to Borrower than would be obtained in an arm’s length transaction with a non-affiliated entity; provided, any such transaction shall not be a breach of this Section 7.7 if approved by a disinterested majority of the Borrower’s Board of Directors.

7.8 Compliance. (i) Become an “investment company” under the Investment Company Act of 1940 or extend credit to purchase or carry margin stock; (ii) fail to meet the minimum funding requirements of ERISA; (iii) permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; (iv) fail to comply with the Federal Fair Labor Standards Act; or (v) violate any other material law or material regulation where such violation could reasonably be expected to adversely affect Lender or have a material adverse effect on the Borrower and its subsidiaries taken as a whole.

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7.9 UCC Effectiveness. Change its name, jurisdiction of organization, or take any other action that could render Lender’s financing statements misleading under the Code, without giving Lender 30 days advance written notice of such action.

7.10 Deposit and Securities Accounts. Maintain any deposit accounts or accounts holding securities owned by Borrower except accounts in which Lender has obtained a perfected first priority security interest.

8.    EVENTS OF DEFAULT

Any one or more of the following shall constitute an Event of Default by Borrower hereunder:

8.1 Payment. Borrower (i) fails to pay when due and payable in accordance with the Loan Documents any portion of the Obligations, or (ii) cancels an ACH payment or transfer Lender has initiated in conformity with the terms hereof provided, however, that an Event of Default shall not occur on account of a failure to pay due solely to an administrative or operational error if Borrower had the funds to make the payment when due and makes the payment not later than 5 days following Borrower’s knowledge of such failure to pay.

8.2 Certain Covenant Defaults. Borrower fails to perform any obligation under Section 6.5 or 6.6, or violates any of the covenants contained in Section 7.

8.3 Other Covenant Defaults. Borrower fails or neglects to perform, keep, or observe any other term, provision, condition, covenant, or agreement contained in this Agreement, in any of the other Loan Documents, or in any other present or future agreement between Borrower and Lender and has failed to cure such failure within 30 days after its occurrence.

8.4 Attachment. Any material portion of Borrower’s assets is attached, seized, subjected to a government levy, lien, writ or distress warrant, or comes into the possession of any trustee or receiver and the same is not returned, removed, waived, stayed, discharged or rescinded within 30 days.

8.5 Other Agreements. There is a default in any agreement to which Borrower is a party resulting in a right by a third party, whether or not exercised, to accelerate the maturity of any Indebtedness, in a principal amount greater than $50,000.

8.6 Judgments. One or more judgments for an aggregate of at least $50,000 is rendered against Borrower and remains unsatisfied and unstayed for more than 30 days.

8.7 Injunction. Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct any material part of its business affairs, or if a judgment or other claim becomes a Lien upon any portion of Borrower’s assets in excess of $50,000.

8.8 Misrepresentation. Any written representation, statement, or report made to Lender by Borrower was false or misleading when made in any material respect.

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8.9 Enforceability. Lender’s ability to enforce its rights against Borrower or any Collateral is impaired in any material respect, or Borrower asserts that any Loan Document is not a legal, valid and binding obligation of Borrower enforceable in accordance with its terms.

8.10 Involuntary Bankruptcy. An involuntary bankruptcy case remains undismissed or unstayed for 60 days or, if earlier, an order granting the relief sought is entered.

8.11 Voluntary Bankruptcy or Insolvency. Borrower commences a voluntary case under applicable bankruptcy or insolvency law, consents to the entry of an order for relief in an involuntary case under any such law, or consents or is subject to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian or other similar official of Borrower or any substantial part of its property, or makes an assignment for the benefit of creditors, or fails generally or admits in writing to its inability to pay its debts as they become due, or takes any corporate action in furtherance of any of the foregoing.

8.12 Merger without Assumption. Borrower or all or substantially all of Borrower’s assets are acquired by or merged into any other business entity where more than 50% of Borrower’s voting power is transferred by existing shareholders of Borrower, and such acquirer or resulting entity either: (i) does not pay off the Obligations at the closing of the acquisition, merger or sale; or (ii) does not provide an unconditional, unlimited guaranty of the Obligations in form and substance satisfactory to Lender and is of a credit quality unacceptable to Lender.

9.    LENDER’S RIGHTS AND REMEDIES

9.1 Rights and Remedies. Upon the occurrence and continuance of any Event of Default, Lender may, at its election, without notice of election and without demand, do any one or more of the following, all of which are authorized by Borrower: (i) accelerate and declare the Loan and all Obligations immediately due and payable; (ii) make such payments and do such acts as Lender considers necessary or reasonable to protect its security interest in the Collateral, with such amounts becoming Obligations bearing interest at the Default Rate; (iii) exercise any and all other rights and remedies available under the UCC or otherwise; (iv) require Borrower to assemble the Collateral at such places as Lender may designate; (v) enter premises where any Collateral is located, take, maintain possession of, or render unusable the Collateral or any part of it; (vi) without notice to Borrower, set off and recoup against any portion of the Obligations; (vii) ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell the Collateral, in connection with which Borrower hereby grants Lender a license to use without charge Borrower’s premises, labels, name, trademarks, and other property necessary to complete, advertise, and sell any Collateral; and (viii) sell the Collateral at one or more public or private sales.

9.2 Power of Attorney in Respect of the Collateral. Borrower hereby irrevocably, until the Obligations are paid in full and the Commitment Termination Date has passed, appoints Lender (which appointment is coupled with an interest) its true and lawful attorney in fact with full power of substitution, for it and in its name to, after an Event of Default has occurred and is continuing: (i) ask, demand, collect, receive, sue for, compound and give acquittance for any and all Collateral with full power to settle, adjust or compromise any claim, (ii) receive payment of and endorse the name of Borrower on any items of Collateral, (iii) make all demands, consents

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and waivers, or take any other action with respect to, the Collateral, (iv) file any claim or take any other action, in Lender’s or Borrower’s name, which Lender may reasonably deem appropriate to protect its rights in the Collateral, or (v) otherwise act with respect to the Collateral as though Lender were its outright owner.

9.3 Charges. If Borrower fails to pay any amounts required hereunder to be paid by Borrower to any third party, Lender may at its option pay any part thereof and any amounts so paid including Lender’s Expenses incurred shall become Obligations, immediately due and payable, bearing interest at the Default Rate, and secured by the Collateral. Any such payments by Lender shall not constitute an agreement to make similar payments or a waiver of any Event of Default.

9.4 Remedies Cumulative. Lender’s rights and remedies under the Loan Documents and all other agreements with Borrower shall be cumulative. Lender shall have all other rights and remedies as provided under the UCC, by law, or in equity. No exercise by Lender of one right or remedy shall be deemed an election, and no waiver by Lender of any Event of Default shall be deemed a continuing waiver. No delay by Lender shall constitute a waiver, election, or acquiescence.

9.5 Application of Collateral Proceeds. Lender will promptly apply proceeds of sale, to the extent actually received in cash, in the manner and order it determines in its sole discretion, and as prescribed by applicable law.

10.    WAIVERS; INDEMNIFICATION

10.1 Waivers. Without limiting the generality of the other waivers made by Borrower herein, to the maximum extent permitted under applicable law, Borrower hereby irrevocably waives all of the following: (i) any right to assert against Lender as a defense, counterclaim, set-off or crossclaim, any defense (legal or equitable), set-off, counterclaim, crossclaim and/or other claim either (a),which Borrower may now or at any time hereafter have obtained by assignment from a third party, or (b) arising directly or indirectly from the present or future lack of perfection, sufficiency, validity and/or enforceability of any Loan Document, or any security interest; (ii) presentment, demand and notice of presentment, dishonor, notice of intent to accelerate, protest, default, nonpayment, maturity, release, compromise, settlement, extension or renewal of any or all accounts, documents, instruments, chattel paper and guaranties at any time held by Lender on which Borrower may in any way be liable and hereby ratifies and confirms whatever Lender may do in this regard; (iii) the benefit of all marshalling, valuation, appraisal and exemption laws; (iv) the right, if any, to require Lender to (a) proceed against any person liable for any of the Obligations as a condition to or before proceeding hereunder; or (b) foreclose upon, sell or otherwise realize upon or collect or apply any other property, real or personal, securing any of the Obligations, as a condition to, or before proceeding hereunder; (v) any demand for possession before the commencement of any suit or action to recover possession of Collateral; and (vi) any requirement that Lender retain possession and not dispose of Collateral until after trial or final judgment.

10.2 Lender’s Liability for Collateral. Lender shall not in any way or manner be liable or responsible for: (i) the safekeeping of any Collateral; (ii) any loss or damage thereto occurring

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or arising in any manner or fashion from any cause other than Lender’s gross negligence or willful misconduct; (iii) any diminution in the value thereof, or (iv) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other person or entity whomsoever. Except as noted in the preceding sentence, all risk of loss, damage or destruction of the Collateral shall be borne by Borrower. Lender will have no responsibility for taking any steps to preserve rights against any parties respecting any Collateral. Lender’s powers hereunder are conferred solely to protect its interest in the Collateral and do not impose any duty to exercise any such powers. None of Lender or any of its officers, directors, employees, agents or counsel will be liable for any action lawfully taken or omitted to be taken hereunder or in connection herewith (excepting gross negligence or willful misconduct), nor under any circumstances have any liability to Borrower for lost profits or other special, indirect, punitive, or consequential damages. Lender retains any documents delivered by Borrower only for purposes relating to the Agreement and for such period as Lender, at its sole discretion, may determine necessary, after which time Lender may destroy such records without notice to or consent from Borrower.

10.3 Indemnification. Borrower shall defend, indemnify, and hold Lender and each of its officers, directors, employees, counsel, partners, agents and attorneys-in-fact (each, an “Indemnified Person”) harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses or disbursements (including Lender’s Expenses and reasonable attorney’s fees and the allocated cost of in-house counsel) of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement and any other Loan Documents, or the transactions contemplated hereby and thereby. with respect to noncompliance with laws or regulations respecting Regulated Substances, government secrecy or technology export, or any Lien not created by Lender or right of another against any Collateral, even if the Collateral is foreclosed upon or sold pursuant hereto, and with respect to any investigation, litigation or proceeding before any agency, court or other governmental authority relating to this Agreement or the Advances or the use of the proceeds thereof, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the “Indemnified Liabilities”); provided, that Borrower shall have no obligation hereunder to any Indemnified Person with respect to Indemnified Liabilities arising from the gross negligence or willful misconduct of such Indemnified Person. The obligations in this Section shall survive the Term. At the election of any Indemnified Person, Borrower shall defend such Indemnified Person using legal counsel satisfactory to such Indemnified Person, at the sole cost and expense of Borrower. A person seeking to be indemnified under this Section 10.3 shall notify Borrower of any event requiring indemnification within 30 days following such person’s receipt of notice of commencement of any action of proceeding, or such person’s obtaining knowledge of the occurrence of any other event, giving rise to a claim for indemnification hereunder. Borrower will be entitled (but not obligated) to participate in the defense or settlement of any such action or proceeding or to participate in any negotiations to settle or otherwise resolve any claim using counsel of its choice. All amounts owing under this Section shall be paid within 30 days after written demand.

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11.    NOTICES

All notices shall be in writing and personally delivered or sent by certified mail, postage prepaid, return receipt requested, or by confirmed facsimile, at the respective addresses set forth below:

If to Borrower:	If to Lender:
Restore Medical Inc.	Lighthouse Capital Partners V, LP
2800 Patton Road	500 Drake’s Landing Road
St. Paul, Minnesota 55113	Greenbrae, California 94904
Attention: Chief Financial Officer	Attention: Contract Administrator
FAX: (651) 634-3025	FAX: (415) 925-3387

12.    GENERAL PROVISIONS

12.1 Successors and Assigns. This Agreement shall bind and inure to the benefit of the parties’ respective successors and permitted assigns. Borrower may not assign any rights hereunder without Lender’s prior written consent, which consent may be granted or withheld in Lender’s sole discretion. Lender shall have the right without the consent of or notice to Borrower to sell, transfer, negotiate, or grant participation in all or any part of any Loan Document.

12.2 Time of Essence. Time is of the essence for the performance of all Obligations.

12.3 Severability of Provisions. Each provision hereof shall be severable from every other provision in determining its legal enforceability.

12.4 Entire Agreement. This Agreement and each of the other Loan Documents dated as of the date hereof, taken together, constitute and contain the entire agreement between Borrower and Lender with respect to their subject matter and supersede any and all prior agreements, negotiations, correspondence, understandings and communications between the parties, whether written or oral. This Agreement is the result of negotiations between and has been reviewed by the Borrower and Lender as of the date hereof and their respective counsel; accordingly, this Agreement shall be deemed to be the product of the parties hereto, and no ambiguity shall be construed in favor of or against Borrower or Lender. This Agreement may only be modified with the written consent of Lender and Borrower. Any waiver or consent with respect to any provision of the Loan Documents shall be effective only in the specific instance and for the specific purpose for which it was given. No notice to or demand on Borrower in any one case shall entitle Borrower to any other or further notice or demand in similar or other circumstances.

12.5 Reliance by Lender. All covenants, agreements, representations and warranties made herein by Borrower shall, notwithstanding any investigation by Lender, be deemed to be material to and to have been relied upon by Lender.

12.6 No Set-Offs by Borrower. All sums payable by Borrower pursuant to this Agreement or any of the other Loan Documents shall be payable without notice or demand and shall be payable in United States Dollars without set-off or reduction of any manner whatsoever.

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12.7 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, and all of which, when taken together, shall constitute one and the same original instrument.

12.8 Survival. All covenants, representations and warranties made in this Agreement shall continue in full force and effect so long as any Obligations remain outstanding.

12.9 No Original Issue Discount. Borrower and Lender acknowledge and agree that the Warrant is part of an investment unit within the meaning of Section 1273(c)(2) of the Internal Revenue Code, which includes the Loan. Borrower and Lender further agree as between them, that the fair market value of the Warrant is $100 and that, pursuant to Treas. Reg. § 1.1273-2(h), $100 of the issue price of the investment unit will be allocable to the Warrant and the balance shall be allocable to the Loans. Borrower and Lender agree to prepare their federal income tax returns in a manner consistent with the foregoing and, pursuant to Treas. Reg. § 1.1273, the original issue discount on the Loan shall be considered to be zero.

12.10 Relationship of Parties. The relationship between Borrower and Lender is, and at all times shall remain, solely that of a borrower and lender. Lender is not a partner or joint venturer of Borrower; nor shall Lender under any circumstances be deemed to be in a relationship of confidence or trust or have a fiduciary relationship with Borrower or any of its affiliates, or to owe any fiduciary duty to Borrower or any of its affiliates. Lender does not undertake or assume any responsibility or duty to Borrower or any of its affiliates to select, review, inspect, supervise, pass judgment upon or otherwise inform any of them of any matter in connection with its or their property, the Loans, any Collateral or the operations of Borrower or any of its affiliates. Borrower and each of its affiliates shall rely entirely on their own judgment with respect to such matters, and any review, inspection, supervision, exercise of judgment or supply of information undertaken or assumed by Lender in connection with such matters is solely for the protection of Lender and neither Borrower nor any affiliate is entitled to rely thereon.

12.11 Choice of Law and Venue; Jury Trial Waiver. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. EACH OF BORROWER AND LENDER HEREBY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN THE CITY AND COUNTY OF SAN FRANCISCO, STATE OF CALIFORNIA. BORROWER AND LENDER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY FURTHER WAIVES ANY RIGHT TO CONSOLIDATE ANY ACTION IN WHICH A JURY TRIAL HAS BEEN WAIVED WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED.

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

RESTORE MEDICAL INC.	LIGHTHOUSE CAPITAL
	PARTNERS V, L.P.
	By:	LIGHTHOUSE MANAGEMENT
		PARTNERS V, L.L.C., its general
		partner

By:	/s/ Susan L. Critzer	By:	/s/ Thomas Conneely
Name: Susan L. Critzer		Name: Thomas Conneely
Title: Chief Executive Officer		Title: Vice President

Exhibit A	Collateral Description
Exhibit B	Form of Note
Exhibit C	Form of Preferred Stock Warrant
Exhibit D	Form of Notice of Borrowing
Exhibit E	Form of Incumbency Certificate
Exhibit F	Form of Officers Certificate
Exhibit G	ACH Authorization
Exhibit H	Form of Negative Pledge Agreement
Exhibit I	Control Agreement
Schedule I	Disclosure Schedule

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EX-10.2A

Exhibit 10.2A

AMENDMENT NO. 01 TO THE LOAN AND SECURITY AGREEMENT
DATED March 23, 2005

Dated March 3, 2006

     this Amendment No. 01 (“Amendment 01”) to that certain Loan and Security Agreement No. 4541 dated March 23, 2005 (the “Agreement”) is entered into as of March 3, 2006, by and between Lighthouse Capital Partners V, L.P. (“Lender”) and Restore Medical, Inc., (fka Restore Medical Inc.) a Delaware corporation (“Borrower”).

     WHEREAS, Borrower and Lender have previously entered into the Agreement; and

     WHEREAS, Borrower has formally changed its name from Restore Medical Inc. to Restore Medical, Inc.; and

     WHEREAS, Borrower has requested Lender provide additional term loan financing in the amount of $3,000,000; and

     WHEREAS, Lender has agreed to do so under the Agreement, subject to all of the terms and conditions hereof and of the Agreement;

     NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, the parties hereby agree to modify the Agreement and to perform such other covenants and conditions as follows:

(All capitalized terms not otherwise defined herein shall have the meanings given to such terms in the Agreement.)

I. Section 1.1, the following definitions shall be added to the Agreement:

"Commitment One” means $5,000,000.

"Commitment Two” means $3,000,000.

"New Warrant” mean the Warrant in favor of Lender to purchase securities of Borrower, substantially in the form of Exhibit C-1 attached to this Amendment 01 and issued in conjunction with Commitment Two.

II. Section 1.1, the following definitions of the Agreement shall be deleted in its entirety and replaced with the following:

"Collateral” means: (i) all property of Borrower in which Lender or an affiliate of Lender now has or hereafter obtains a security interest or which is described on Exhibit A attached hereto, as amended in conjunction with this Amendment 01; and (ii) all products and proceeds of the foregoing, including proceeds of insurance and proceeds of proceeds.

"Commitment” means collectively, the Commitment One and Commitment Two.

"Commitment Termination Date” means the earliest to occur of (i) for Advances under Commitment One, (a) December 31, 2005 if Borrower has not drawn at least $2,000,000 in Advances under Commitment One by such date; or (b) July 1, 2006; (ii) for Advances under Commitment Two, April 1, 2006; (iv) for any Advances, any Default or Event of Default, or (v) for any Advances, in Lender’s sole judgment, any adverse change in the composition of Borrower’s Board of Directors after the date hereof (at any time prior to an initial public offering of the Company’s common stock (“IPO”), this may be defined as the continued representation by a director nominated by MPM Capital, provided, that this clause (v) shall terminate upon consummation of an IPO).

"Lender’s Expenses” means all reasonable costs or expenses (including reasonable attorneys’ fees and expenses) incurred in connection with the preparation, negotiation, modification, administration, or enforcement of the Loan or Loan Documents, or the exercise or preservation of any rights or remedies by Lender, whether or not suit is brought; provided, however, that Lender’s Expenses for the preparation and negotiation of the initial set of Loan Documents under Commitment One shall not exceed $10,000 or $2,500 under Commitment Two, in each case to be evidenced by a reasonably detailed invoice setting forth such actual costs and expenses, including reasonable attorneys’ fees and expenses. Lender will apply deposits received before the date hereof, if any, towards Lender’s Expenses.

"Loan Documents” means, collectively, the Agreement, Amendment 01, the Warrants, the Notes and all other documents, instruments and agreements entered into between Borrower and Lender in connection with the Loan, all as amended or extended from time to time.

"Notice of Borrowing” means the form attached to Amendment 01 as Exhibit D.

"Warrants” means (i) means a Warrant in favor of Lender to purchase securities of Borrower substantially in the form of Exhibit C to the Agreement, and (ii) the New Warrant.

III. Section 6, Affirmative Covenants, the following new Section 6.8 shall be added to the Agreement:

Section 6.8 Release of Lien on Intellectual Property. Lender agrees that on the earlier to occur of either (i) the effective date on which the Borrower raises a minimum of $20,000,000 in the initial public offering of Borrower’s common stock, or (ii) the closing of a preferred stock equity financing with proceeds to Borrower of at least $10,000,000, Lender’s Lien on Borrower’s intellectual property which has been granted to Lender in conjunction with this Amendment 01 shall be deemed terminated and Lender shall take any such action necessary to evidence the release of such Lien.

IV. Exhibit A, Collateral, shall be amended and replaced with Exhibit A attached to this Amendment 01 and Lender shall take such action necessary to amend the financing statements filed in conjunction with the Agreement.

V. Conditions Precedent to Closing this Amendment 01:

     (a) This Amendment 01 duly executed by Borrower.

     (b) Exhibit A duly executed by Borrower.

     (c) The New Warrant to be issued to Lender duly executed by Borrower.

     (d) Amendment 01 to Warrant Agreement dated March 23, 2005 duly executed by Borrower.

     (e) An Incumbency Certificate of Borrower attached hereto as Exhibit E-1 with copies of the following documents attached: (i) the certificate of incorporation and by-laws or other organizational documents of Borrower certified by Borrower as being in full force and effect as of the date of Amendment 01, (ii) incumbency and representative signatures, and (iii) resolutions authorizing the execution and delivery of Amendment 01 and each of the other Loan Documents.

     (f) A good standing certificate from Borrower’s state of incorporation or formation and the state in which Borrower’s principal place of business is located, together with certificates of the applicable governmental authorities stating that Borrower is in compliance with the franchise tax laws of each such state, each dated as of a recent date.

     (g) All necessary consents of shareholders, members, and other third parties with respect to the execution, delivery and performance of this Agreement, Amendment 01, the New Warrant, and the other Loan Documents.

     (h) Borrower reaffirms the representations and warranties made to Lender in the Agreement as of the date hereof as though fully set forth herein.

Except as amended hereby, the Agreement remains unmodified and unchanged.

BORROWER: RESTORE MEDICAL, INC.			LENDER: LIGHTHOUSE CAPITAL PARTNERS V, L.P.
By:	/s/ J. Robert Paulson, Jr.		By:	LIGHTHOUSE MANAGEMENT PARTNERS V, L.L.C., its general partner
	Name:	J. Robert Paulson, Jr.	By:	/s/ Thomas Conneely
	Title:	President and Chief Executive Officer		Name:	Thomas Conneely
				Title:	Vice President

EX-10.3

Exhibit 10.3

EMPLOYMENT AND CHANGE IN CONTROL AGREEMENT

     This Employment and Change in Control Agreement (“Agreement”) is made effective as of April 11, 2005, by and between Restore Medical Inc., a Minnesota corporation (the “Company”), and J. Robert Paulson, an individual resident of Minnesota (the “Employee”).

     WHEREAS, the Company desires to employ Employee as its President and Chief Executive Officer (“CEO”) and designate Employee as a Director of the Company, and Employee desires to accept such employment and designation, both subject to the terms and conditions of this Agreement;

     WHEREAS, the parties have decided it is in their mutual best interests to memorialize in writing certain terms and conditions of the employment relationship between them; and

     WHEREAS, Employee understands that nothing in this Agreement creates any guarantee of continuous employment with the Company, and that Employee’s employment may be terminated by either the Company or Employee at any time, upon such notice as may be required in this Agreement;

     NOW, THEREFORE, in consideration of Employee’s employment with the Company and the foregoing premises, the mutual covenants set forth below, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and Employee agree as follows.

     1. Term of Agreement. As set forth herein, the parties respective obligations under this Agreement shall commence on April 11, 2005, and shall extend indefinitely until this Agreement is terminated by either party according to Section 4 below (the “Term”), provided, however, that any provision in this Agreement that by its terms survives expiration of this Agreement shall so survive and Employee shall continue to be bound by the terms of each such provision for the time period set forth therein. The Employee shall be employed on an at-will basis. This Agreement is not, and shall not be construed as, an employment contract affecting in any way the duration of the Employee’s employment or any terms and conditions thereof except those set forth herein. As set forth below, the Employee and the Company may terminate their employment relationship at any time, for any reason or for no reason, with cause or without cause.

     2. Position and Duties. During the Term, the Employee agrees to serve as President and CEO and Director, subject and reporting to the Board of Directors. The Employee agrees to perform such reasonable duties and responsibilities as are customary for the Employee’s position and such other duties and responsibilities that may be assigned by the Board of Directors from time to time. During the Term, the Employee agrees to serve Company faithfully and to the best of the Employee’s ability and to devote the Employee’s full business time, attention and efforts to the business and affairs of Company (exclusive of any period of vacation, sick, disability, or other leave to which Employee is entitled) during normal business hours. The principal place of employment and the location of Employee’s principal office and normal place of work shall be within the Minneapolis-St. Paul Metropolitan Area. Employee

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will be expected to travel to other locations, as necessary, in the performance of Employee’s duties during the term of this Agreement.

3. Compensation and Benefits.

     (a) Base Salary. During the Term, the Company shall pay the Employee a “Base Salary” of $10,416.66 semi-monthly, which equates to an annualized Base Salary of $250,000.00, paid in accordance with the Company’s regular payroll procedures, policies, and practices and subject to all required deductions, withholdings, and reporting obligations. Employee’s Base Salary may be reviewed by the Company from time to time for potential increases on the basis of the Employee’s performance and the financial standing of the Company.

     (b) Additional Performance Incentive. In addition to Base Salary, the Employee will be eligible to receive an additional performance incentive pursuant to a Management Incentive Plan expected to be adopted by the Board of Directors seasonably after the commencement of Employee’s employment, as such plan may be amended from time to time. The details of Employee’s eligibility for and receipt of this additional performance incentive shall be governed by the terms and conditions of the Management Incentive Plan; however, Employee will be eligible to receive annually an additional performance incentive not to exceed 30% of Base Salary, based on the level of attainment of corporate and individual performance goals established and approved by the Board of Directors initially within 60 days from the date of this Agreement and reestablished at the start of each new calendar year thereafter. If paid, the value of the additional performance incentive will be paid to Employee in some combination of cash and stock option grants, with any such amounts received by the Employee subject to all required withholdings, deductions, and tax reporting requirements.

           (c) Equity Participation.

     (i) The Board of Directors has approved a stock option grant to Employee to purchase up to 817,000 shares of the Company’s common stock at an exercise price of $0.55 per share, with such stock option grant vesting 25% on the first anniversary of the Employee’s employment under this Agreement and the remaining 75% vesting in equal, monthly installments over the next 36 months.

     (ii) In the event of a “Change in Control” (as defined in Section 5(a) below) occurring during the Term of this Agreement, 50% of the remaining unvested portion of this stock option grant shall vest upon the closing of the last transaction necessary to effect the Change in Control. In the further event that the Employee’s employment is terminated at any time following a Change in Control, either by the Company without “Cause” (as defined in Section 5(c) below) or as the result of a “Constructive Termination” (as defined in Section 5(c) below), any remaining unvested portion of this stock option grant shall thereupon vest.

     (iii) In the event of a voluntary termination by the Employee or a termination by the Company with Cause at any time or without Cause prior to a

Change in Control, the Employee’s rights to any remaining unvested portion of this stock option grant shall be extinguished.

     (iv) This stock option grant is made under the Company’s 1999 Omnibus Stock Plan, as amended from time to time (the “Plan”). In no event shall the Plan be amended in a manner that prohibits the exercise of Employee’s stock options as set forth in this Agreement.

     (d) Other Employee Benefits. During the Employee’s employment with the Company, the Employee shall be entitled to participate in the retirement and health and welfare benefits offered generally by the Company to its employees, including medical, dental, flexible spending account, group life, group disability, and 401(k), to the extent that the Employee’s position, tenure, salary, health, and other qualifications make the Employee eligible to participate. The Employee’s participation in such benefits shall be subject to the terms of the applicable plans, as the same may be amended from time to time. The Company does not guarantee the adoption or continuance of any particular employee benefit during the Employee’s employment, and nothing in this Agreement is intended to, or shall in any way restrict the right of the Company, to amend, modify or terminate any of its benefits during the Term of this Agreement. The Employee also will be eligible for the benefits described in the Company’s Executive Compensation Plan, subject to the terms of such Plan, as the same may be amended from time to time. The value of any such benefits the Employee receives shall be imputed and reported to the Employee as income, as required.

     (e) Special Transaction Bonus. In the event of a Change in Control occurring during the Term, provided that there are shares of preferred stock that remain outstanding and provided that the holders of the Company’s outstanding shares of preferred stock receive, after payment of the special transaction bonus provided herein, proceeds in the aggregate equal to at least one times their original purchase price for their shares of preferred stock in the Change in Control transaction, Employee shall be entitled to receive from the aggregate proceeds payable to all stockholders of the Company in the Change in Control transaction a special transaction cash bonus, which, when added to the amount to be received by Employee in such transaction for all outstanding shares of capital stock of the Company and any vested options and/or warrants to acquire shares of capital stock of the Company (“Employee’s Equity”), will result in Employee receiving total proceeds equal to four percent (4%) of the net proceeds payable to the Company’s stockholders and holders of outstanding options and/or warrants in such Change in Control transaction. Examples of the transaction bonus calculation are attached as Exhibit A.

4. Termination of Employment.

     (a) By the Company, at Any Time, with Cause. At any time during the Term, the Company may terminate the Employee’s employment for Cause. In the event of a termination with Cause, the Company’s obligations to the Employee hereunder shall terminate, except as to amounts already vested or earned by but unpaid to the Employee as of the date of termination.

     (b) By the Company, at Any Time Prior to a Change in Control, Without Cause. The Company may terminate the Employee’s employment at any time without Cause. In the event such a termination without Cause occurs at any time prior to a Change in Control occurring during the Term, in addition to amounts already vested or earned by but unpaid to the Employee as of the date of termination, the Employee shall be entitled to receive 6 months Base Salary continuation, paid according to the Company’s normal payroll schedule and subject to all required withholdings and reporting obligations. The Company shall also provide the Employee and his current family members with continued group health coverage, including medical and dental coverage, as otherwise required under applicable stated continuation law and the Consolidated Omnibus Budget Reconciliation Act of 1986, 29 U.S.C. §§ 1161-1168; 26 U.S.C. § 4980B(f), as amended, and all applicable regulations (referred to collectively as “COBRA”). Provided that Employee makes the necessary COBRA elections, the Company will pay the total applicable premium cost for such medical and dental COBRA continuation coverage for Employee and his family for a period of up to 6 months commencing on the date of termination of employment; provided, however, that the Company’s obligation to pay for such premiums shall terminate if (i) Employee or his wife becomes covered under another company’s like benefit plan; (ii) Employee is eligible (whether or not covered) under Medicare; or (iii) Employee dies. Such COBRA premiums paid on Employee’s behalf will be imputed to Employee as income, as required by law. After expiration of the 6 month period in which the Company pays the above-described premiums, if necessary, Employee will be responsible for payment of such premiums for as long a period as is allowable under applicable law.

     (c) By the Company, at Any Time Following a Change in Control, Without Cause. In the event that a termination without Cause occurs following the closing date of the last transaction necessary to effect a Change in Control occurring during the Term, in addition to amounts already vested or earned by but unpaid to the Employee as of the date of termination, the Employee shall be entitled to receive 12 months Base Salary continuation, paid according to the Company’s normal payroll schedule and subject to all required withholdings and reporting obligations. The Company shall also provide the Employee and his current family members with continued group health coverage, including medical and dental coverage, as otherwise required under applicable stated continuation law and the Consolidated Omnibus Budget Reconciliation Act of 1986, 29 U.S.C. §§ 1161-1168; 26 U.S.C. § 4980B(f), as amended, and all applicable regulations (referred to collectively as “COBRA”). Provided that Employee makes the necessary COBRA elections, the Company will pay the total applicable premium cost for such medical and dental COBRA continuation coverage for Employee and his family for a period of up to 12 months commencing on the date of termination of employment; provided, however, that the Company’s obligation to pay for such premiums shall terminate if (i) Employee or his wife becomes covered under another company’s like benefit plan; (ii) Employee is eligible (whether or not covered) under Medicare; or (iii) Employee dies. Such COBRA premiums paid on Employee’s behalf will be imputed to Employee as income, as required by law. After expiration of the 12 month period in which the Company pays the above-described premiums, if necessary, Employee will be responsible for payment of such premiums for as long a period as is allowable under applicable law.

     (d) By the Employee, at Any Time Following a Change in Control, as the Result of a Constructive Termination. In the event that a Constructive Termination occurs at any time during the Term and following the closing date of the last transaction necessary to effect a Change in Control occurring during the Term, in addition to amounts already vested or earned by but unpaid to the Employee as of the date of termination, the Employee shall be entitled to receive 12 months Base Salary continuation, paid according to the Company’s normal payroll schedule and subject to all required withholdings and reporting obligations. The Company shall also provide the Employee and his current family members with continued group health coverage, including medical and dental coverage, as otherwise required under applicable stated continuation law and the Consolidated Omnibus Budget Reconciliation Act of 1986, 29 U.S.C. §§ 1161-1168; 26 U.S.C. § 4980B(f), as amended, and all applicable regulations (referred to collectively as “COBRA”). Provided that Employee makes the necessary COBRA elections, the Company will pay the total applicable premium cost for such medical and dental COBRA continuation coverage for Employee and his family for a period of up to 12 months commencing on the date of termination of employment; provided, however, that the Company’s obligation to pay for such premiums shall terminate if (i) Employee or his wife becomes covered under another company’s like benefit plan; (ii) Employee is eligible (whether or not covered) under Medicare; or (iii) Employee dies. Such COBRA premiums paid on Employee’s behalf will be imputed to Employee as income, as required by law. After expiration of the 12 month period in which the Company pays the above-described premiums, if necessary, Employee will be responsible for payment of such premiums for as long a period as is allowable under applicable law.

     (e) Due to Employee’s Death or Disability. This Agreement shall terminate immediately upon the Employee’s death or upon a finding by the Company’s Board of Directors, in its sole discretion and subject to applicable law, that the Employee is unable to carry out the Employee’s essential job functions to any substantial degree by reason of Disability (as defined in Section 5(d) below). In either such case, the Company’s obligations to the Employee hereunder shall terminate, except as to amounts already vested or earned by but unpaid to Employee as of that date.

5. Definitions.

(a) A “Change in Control” shall be deemed to have occurred if:

     (i) Any “person” (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) who did not own shares of the capital stock of the Company on the date of grant of the Option shall, together with his, her or its “Affiliates” and “Associates” (as such terms are defined in Rule 12b-2 promulgated under the Exchange Act), become the “Beneficial Owner” (as such term is defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company’s then outstanding securities (any such person being hereinafter referred to as an “Acquiring Person”);

     (ii) The “Continuing Directors” (as hereinafter defined) shall cease to constitute a majority of the Company’s Board of Directors;

     (iii) There should occur (A) any consolidation or merger involving the Company and the Company shall not be the continuing or surviving corporation or the shares of the Company’s capital stock shall be converted into cash, securities or other property; provided, however, that this subclause (A) shall not apply to a merger or consolidation in which (i) the Company is the surviving corporation and (ii) the shareholders of the Company immediately prior to the transaction have the same proportionate ownership of the capital stock of the surviving corporation immediately after the transaction; (B) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company; or (C) any liquidation or dissolution of the Company; or

     (iv) The majority of the Continuing Directors determine, in their sole and absolute discretion, that there has been a Change in Control.

     (b) “Constructive Termination” shall mean the occurrence of any of the following events, except for the occurrence of such an event in connection with the termination or reassignment of the Employee’s employment by the Company for Cause or due to the Employee’s death or disability or otherwise approved by the Employee in writing:

     (i) A material diminution in the Employee’s job responsibilities or duties as they existed immediately prior to a Change in Control;

     (ii) A reduction by the Company in the Employee’s Base Salary as in effect immediately prior to a Change in Control;

     (iii) Relocation, following a Change in Control, of the Company’s principal office more than 40 miles from its current location;

     (iv) Any other material breach of this Agreement by the Company, following a Change in Control, which is not cured within 30 days after written notice thereof from the Employee;

     (c) “Cause” shall mean termination by the Company of the Employee’s employment based upon:

     (i) Repeated violations by the Employee of any of his duties or his repeated failures or omissions to carry out lawful and reasonable orders which, in the reasonable judgment of the Company, are willful and deliberate and which are not cured within a reasonable period after the Employee’s receipt of written notice thereof from the Company;

     (ii) Any act or acts of personal dishonesty by the Employee and intended to result in the personal enrichment of the Employee at the expense of the Company;

     (iii) Any willful and deliberate misconduct that is materially and demonstrably injurious to the Company; or

     (iv) Any criminal indictment, presentment, or conviction for a felony, whether or not the Company is the victim of such offense.

     (d) “Disability” shall mean any physical or mental condition which causes the Employee to fail to perform the Employee’s essential job functions on behalf of the Company over a period of 90 days during any 180 day period. The existence or nonexistence of the Employee’s disability will be determined in good faith and subject to applicable law by the Board of Directors, after giving notice in writing to the Employee at least 30 days prior to such determination. During such 30 day period, the Employee shall be permitted to make a presentation to the Board of Directors for its consideration.

     (e) “Continuing Director” shall mean any person who is a member of the Board of Directors of the Company, while such person is a member of the Board of Directors, who is not an Acquiring Person, or a representative of an Acquiring Person or any such Affiliate or Associate, and who:

     (i) was a member of the Board of Directors on the date of this Agreement as first written above; or

     (ii) subsequently becomes a member of the Board of Directors, if such person’s initial nomination for election or initial election to the Board of Directors is recommended or approved by a majority of the Continuing Directors. For purposes of this Section 5(e), “Affiliate” and “Associate” shall have the respective meanings described to such terms in Rule 12-b-2 promulgated under the Exchange Act.

6. Successors and Binding Agreement.

     (a) This Agreement may be transferred, in whole or in part, by the Company to its successors and assigns, and the Employee will remain bound to fulfill the Employee’s obligations hereunder. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure to obtain such assumption and agreement prior to the effective date of any such succession shall be a breach of this Agreement and shall entitled Employee to the rights and benefits from the Company in the same amount and on the same terms as if Employee’s employment had been terminated by the Company, within 12 months following a Change in Control, without Cause.

     (b) The Agreement is personal to the Employee, and the Employee may not assign or transfer any part of his rights or duties hereunder, or any compensation due to him hereunder, to any other person. Notwithstanding the foregoing, this Agreement shall inure to the benefit of, and be enforceable by, the Employee’s personal or legal representatives, executors, administrators, heirs, distributees, devicees, and legatees.

     7. Limitation of Damages. If for any reason the Employee believes the severance provisions of this Agreement have not been properly adhered to by the Company, and if, pursuant to Sections 8 and 12 hereof, it is determined that the Company has not, in fact, properly adhered to the severance provisions of this Agreement, the sole and exclusive remedy to which the Employee is entitled is the severance payment to which the Employee is entitled under the provisions of this Agreement, which, in the case of stock options, means the right to exercise such options according to the original terms of the grant but not a monetary payment in lieu of such stock options.

     8. Dispute Resolution. Except as provided in Subsection 8(d) hereof, any controversy, claim, or dispute arising out of or relating to the making, performance, breach, termination, expiration, application, or meaning of this Agreement shall be resolved exclusively by arbitration before the American Arbitration Association in Minneapolis, Minnesota, pursuant to the American Arbitration Association’s rules then in effect. In the event that Employee terminates employment claiming Constructive Termination, which claim is disputed by the Company, or the Company terminates Employee’s employment for Cause, which claim is disputed by Employee, Employee shall receive severance benefits at 50% of the specified rate until the dispute is resolved in arbitration or for 12 months, whichever comes first. If Employee prevails in such a dispute, the Company shall pay full severance benefits to Employee, less any partial severance benefits already paid. If the Company prevails, the Company’s obligation to pay Employee severance benefits immediately shall cease and Employee shall repay any severance benefits already paid and agree to a lien on any shares held by Employee in the Company to secure this repayment obligation, with the exact number of shares subject to the lien determined based on the most recent fair market value determination done by or on behalf of the Board. In either case, the duration of any of the applicable restrictive covenants described in Section 8(d) below shall run from the original date of termination.

     (a) The decision of the arbitrator(s) shall be final and binding on both parties. Judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. In the event of submission of any dispute to arbitration, each party shall, not later than 30 days prior to the date set for hearing, provide to the other party and to the arbitrator(s) a copy of all exhibits upon which the party intends to rely at the hearing and a list of all persons whom the party intends to call as witnesses at the hearing.

     (b) The arbitrator(s) shall strictly adhere to the sole and exclusive remedy set forth in Section 7 hereof and may not award or assess punitive damages against either party. The arbitrator shall, however, have the authority to award the prevailing party its reasonable attorneys’ fees incurred in the arbitration.

     (c) Each party shall bear its own costs and expenses of the arbitration and one-half (¹/2) of the fees and costs of the arbitrator(s).

     (d) This Section 8 shall have no application to claims by the Company asserting violation of or seeking to enforce, by injunction or otherwise, the terms of the February 18, 2005, Nondisclosure and Noncompetition Agreement (“Nondisclosure Agreement”) between the parties, which Nondisclosure Agreement, to the extent not inconsistent with any of the provisions in this Agreement, is hereby incorporated by reference and made a part of this Agreement. Such claims may be maintained by the Company in a lawsuit in a court of competent jurisdiction.

     9. Modification; Waiver. No provisions of this Agreement may be modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in a writing signed by the Employee and such officer as may be specifically designated by the Board of Directors of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.

     10. Notice. All notices, requests, demands, and all other communications required or permitted by either party to the other party by this Agreement (including, without limitation, any notice of termination of employment) shall be in writing and shall be deemed to have been duly given when delivered personally or received by certified or registered mail, return receipt requested, postage prepaid, at the address of the other party as first written above {directed to the attention of the Board of Directors in the case of the Company). Either party hereto may change its address for purposes of this Section 10 by giving 15 days’ prior written notice to the other party hereto.

     11. Severability. If any term or provision of this Agreement or the application hereof to any person or circumstances shall to any extent be invalid or unenforceable, the remainder of this Agreement or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable shall not be effected thereby, and each term and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law.

     12. Governing Law. This Agreement has been executed and delivered in the State of Minnesota and shall in all respects be governed by, and construed and enforced in accordance with, the laws of the State of Minnesota, including all matters of construction, validity, and performance.

     13. Effect of Agreement; Entire Agreement. The Company and the Employee understand and agree that this Agreement is intended to reflect their agreement only with respect to the subject matter hereof and is not intended to create any obligation on the part of either party to continue employment. This Agreement supersedes any and all other oral or written agreements or policies made relating to the subject matter hereof and constitutes the entire agreement of the parties relating to the subject matter hereof, provided that this Agreement shall not supersede or limit in any way the Employee’s rights under any benefit plan, program, or arrangements in accordance with their terms. Nor shall this Agreement supersede or limit in any way the Employee’s obligations and the Company’s rights under the parties’ prior Nondisclosure Agreement, as incorporated by reference in Section 8(d) above.

     IN WITNESS WHEREOF, the Company and the Employee have executed this Agreement as of the date first written above.

Restore Medical Inc.

By:	/s/ Mark B. Knudson	/s/ J. Robert Paulson, Jr.
Name: Mark B. Knudson, Ph.D.		J. Robert Paulson, Jr.
Title: Executive Chairman

Exhibit A

TRANSACTION BONUS

CALCULATION EXAMPLE

Transaction Bonus
Calculation Examples
Restore Sale Price	$	60,000,000		$	80,000,000		$	100,000,000		$	120,000,000
1X Preference	$	(40,895,905	)	$	(40,895,905	)	$	40,895,905	)	$	(40,895,905	)
Net Transaction Bonus Amount (NTBA)	$	19,104,095		$	39,104,095		$	59,104,095		$	79,104,095
Bonus Calculation (4% X NTBA)	$	764,164		$	1,564,164		$	2,364,164		$	3,164,164

	$60 Million			$80 Million			$100 Million			$120 Million
Bonus Amount	$	764,164		$	1,564,164		$	2,364,164		$	3,164,164
Net stock option proceeds	$	—		$	—		$	1,198,991		$	1,959,553
Total	$	764,164		$	1,564,164		$	3,563,155		$	5,123,717
Percent of Total Proceeds		1.27	%		1.96	%		3.56	%		4.27	%
4 percent	$	2,400,000			3,200,000			4,000,000			4,800,000

EX-10.4

Exhibit 10.4

CHANGE IN CONTROL AGREEMENT

     This agreement, made and entered into this 19^th day of December, 2002, by and between Pi Medical, Inc., a Minnesota corporation now renamed Restore Medical, Inc. (the “Company”), with its principal offices at 2800 Patton Road, Roseville, Minnesota 55113, and Edward W. Numainville (the “Employee”), residing at 13848 Holly St. N.W., Andover, MN 55304.

     WHEREAS, this Agreement is intended to specify the financial arrangements that the Company will provide to the Employee upon the Employee’s separation from employment with the Company under any of the circumstances described herein; and

     WHEREAS, the Agreement is entered into by the Company in the belief that it is in the best interest of the Company to provide stable conditions of employment for the Employee notwithstanding the possibility, threat, or occurrence of certain types of changes in control, thereby enhancing the Company’s ability to attract and retain highly qualified people; and

     NOW, THEREFORE, in lieu of the foregoing recitals and in consideration of the mutual covenants, promises, payments and undertakings of the parties hereto, the parties agree as follows:

     1. Term of Agreement. The Employee shall be employed on an at-will basis. This Agreement is not, and shall not be construed as, an employment contract affecting in any way the duration of the Employee’s employment or any terms and conditions thereof except those set forth herein. The Employee and the Company may terminate their employment relationship at any time, for any reason, or for no reason. Nothing in this Agreement shall alter any previous agreements between the parties pertaining to confidentiality or ownership of inventions. This Agreement will expire on December 19, 2005.

     2. Termination of Employment.

          (a) Prior to a Change in Control. Prior to a Change in Control (as defined in section 3(a) hereof, the Company may terminate the Employee from employment with the Company at-will with or without Cause (as defined in section 3(c) hereof), at any time.

          (b) After a Change in Control.

               (i) From and after the date of a Change in Control (as defined in section 3(a) hereof) during the term of this Agreement, the Company shall not terminate the Employee from employment with the Company except as provided in this section 2(b), or as a result of the Employee’s Disability (as defined in section 3(d) hereof) or his death.

               (ii) From and after the date of Change in Control (as defined in section 3(a) hereof) during the term of the Agreement, the Company shall have the right to terminate the Employee from employment with the Company at any time during the term of this Agreement for Cause (as defined in section 3(c) hereof), by written notice to the Employee, specifying the particulars of the conduct of the Employee forming the basis for such termination.

               (iii) From and after the date of a Change in Control (as defined in section 3(a) hereof) during the term of the Agreement: (a) the Company shall have the right to terminate the Employee’s employment without Cause (as defined in section 3(c) hereof), at any time; and (b) the Employee shall, upon the occurrence of such termination by the Company without Cause or upon the voluntary termination of the Employee’s employment by the Employee for Good Reason (as defined in section 3(b) hereof), be entitled to receive the benefits provided in section 4 hereof. The Employee shall evidence a voluntary termination for Good Reason by written notice to the Company given within ten (10) days after the date of the occurrence of any event that the Employee knows or should need only identify the Employee and set forth in reasonable detail the facts and circumstances claimed by the Employee to constitute Good Reason. Any notice given by the Employee pursuant to this section 2 shall be effective ten (10) days after the date it is given by the Employee. For purposes of this Section 2(b)(iii), an offer of employment from an acquiring company shall be deemed to be a termination if such offer requires Employee to relocate more than 100 miles from Employee’s current residence.

     3. Definitions.

          (a) A “Change in Control” shall mean:

               (i) A change on control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), whether or not the Company is then subject to such reporting requirement;

               (ii) The public announcement (which, for purposes of this definition, shall include, without limitation, a report filed pursuant to Section 13(d) of the Exchange Act) by the Company or any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) that such person has become the “beneficial owner” (as defined in Rule 13d-3 promulgated under the Exchange Act) directly or indirectly, of securities of the Company representing twenty percent (20%) or more of the combined voting power of the Company’s then outstanding securities;

               (iii) The Continuing Directors cease to constitute a majority of the Company’s Board of Directors;

               (iv) The shareholders of the Company approve: (a) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of Company stock would be converted into cash, securities, or other property, other than a merger of the Company in which shareholders immediately prior to the merger have the same proportionate ownership of stock of the surviving corporation immediately after the merger; (b) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company; or (c) any plan of liquidation or dissolution of the Company; or

               (v) The majority of the Continuing Directors (as defined in section 3(e) hereof) determine in their sole and absolute discretion that there has been a Change in Control of the Company.

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          (b) “Good Reason” shall mean the occurrence of any of the following events, except for the occurrence of such an event in connection with the termination or reassignment of the Employee’s employment by the Company for Cause (as defined in section 3(c) hereof), for Disability (as defined in section 3(d) hereof), or for death:

               (i) The assignment to the Employee of employment responsibilities which are not of comparable responsibility and status as the employment responsibilities held by the Employee immediately prior to Change in Control (as defined in section 3(a) hereof);

               (ii) Any unreasonable reduction by the Company in the Employee’s base salary as in effect immediately prior to the change in control;

               (iii) The failure by the Company to obtain, as specified in section 7(a) hereof, an assumption of the obligations of the Company to perform this Agreement by any successor to the Company; or

               (iv) Any other material breach of the Agreement by the Company which is not cured within thirty (30) days after written notice thereof from the Employee.

          (c) “Cause” shall mean termination by the Company of the Employee’s employment based upon:

               (i) Repeated violations by the Employee of any of his duties or his repeated failures or omissions to carry out lawful and reasonable orders which, in the reasonable judgment of the Company, are willful and deliberate and which are not cured within a reasonable period after the Employee’s receipt of written notice thereof from the Company;

               (ii) Any act or acts of personal dishonesty by the Employee and intended to result in the personal enrichment of the Employee at the expense of the Company;

               (iii) Any willful and deliberate misconduct that is materially and demonstrably injurious to the Company; or

               (iv) Any criminal indictment, presentment, or conviction for a felony, whether or not the Company is the victim of such offense.

          (d) “Disability” shall mean any physical or mental condition which causes the Employee to fail or render services to the Company over a period of ninety (90) days during any one hundred eighty (180) day period. The existence or nonexistence of the Employee’s disability will be determined in good faith by the Board of Directors after notice in writing given to the Employee at least thirty (30) days prior to such determination. During such thirty (30) day period, the Employee shall be permitted to make a presentation to the Board of Directors for its consideration.

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          (e) “Continuing Director” shall mean any person who is a member of the Board of Directors of the Company, while such person is a member of the Board of Directors, who is not an Acquiring Person, or a representative of an Acquiring Person or any such Affiliate or Associate, and who:

               (i) was a member of the Board of Directors on the date of this Agreement as first written above; or

               (ii) subsequently becomes a member of the Board of Directors, if such person’s initial nomination for election or initial election to the Board of Directors is recommended or approved by a majority of the Continuing Directors. For purposes of this section 3(e), “Acquiring Person” shall mean any “person” (as such term is used in sections 13(d) and 14(d) of the Exchange Act) who or which, together with all Affiliates and Associates of such person, is the “beneficial owner” (as defined in Rule 13-d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing twenty percent (20%) or more of the combined voting power of the Company’s then outstanding securities, but shall not include the Company, any subsidiary of the Company, or any entity holding shares of common stock organized, appointed, or established for, or pursuant to the terms of, any such plan; and “Affiliate” and “Associate” shall have the respective meanings described to such terms in Rule 12-b-2 promulgated under the Exchange Act.

     4. Benefits Upon Termination Under section 2(b)(iii).

          (a) Upon the termination (voluntary or involuntary) of the employment of the Employee pursuant to section 2(b)(iii) hereof, the Company shall pay to the Employee, in lieu of any further base salary or bonus payments to the Employee for periods subsequent to the date that the termination of the Employee’s employment becomes effective, as severance pay,

1.

During the first six months following termination, continued compensation payable on the Company’s normal employee pay periods with monthly amounts of such payments equal to the Employee’s average total monthly compensation (as in effect in the month preceding the month in which the termination becomes effective or as in effect in the month preceding the Change in Control, whichever is higher) without any reduction for other employment income earned by Employee during the first six months following termination; and

2.

During the second six months following termination, continued compensation payable on the Company’s normal employee pay periods with monthly amounts of such payments equal to the Employee’s average total monthly compensation (as in effect in the month preceding the month in which the termination becomes effective or as in effect in the month preceding the Change in Control, whichever is higher) less other employment income earned by Employee during the pay periods.

4

          (b) For purposes of this Agreement, total monthly compensation shall include the Employee’s salary and any bonus to which the Employee is otherwise entitled, pro rated for such period, and any such bonus will be calculated as if it were paid out at one hundred percent (100%) of any bonus plan covering the Employee. All payments to the Employee subject to this section 4 shall be subject to any applicable payroll or other taxes required by law to be withheld.

          (c) During the period of time in which payments are being made under this Section 4, the Company will continue to provide the Employee with medical and group life insurance benefits in effect at the time of termination.

          (d) Company may, at its sole option and discretion, pre-pay any or all payments of Section 2(a) as lump-sum payments.

     5. Successors and Binding Agreement.

          (a) The Company will require any successor (whether direct or indirect) by purchase, merger, consolidation, or otherwise to all or substantially all of the business and/or of the assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Employee the compensation from the Company in the same amount and on the same terms as the Employee would be entitled hereunder if the Employee terminated his employment after a Change in Control for Good Reason, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the date that the termination of the Employee’s employment becomes effective. As used in this Agreement, “Company” shall mean the Company and any successor to its business and/or assets which executes and delivers the Agreement provided for in this section 7(a) or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law.

          (b) The Agreement is personal to the Employee, and the Employee may not assign or transfer any part of his rights or duties hereunder, or any compensation due to him hereunder, to any other person. Notwithstanding the foregoing, this Agreement shall enure to the benefit of, and be enforceable by, the Employee’s personal or legal representatives, executors, administrators, heirs, distributees, devicees, and legatees.

     6. Limitation of Damages. If for any reason the Employee believes the severance provisions of this Agreement have not been properly adhered to by the Company, and if, pursuant to section 9 hereof, it is determined that the Company has not, in fact, properly adhered to the severance provisions of this Agreement, the sole and exclusive remedy to which the Employee is entitled is the severance payment to which he is entitled under the provisions of this Agreement.

     7. Dispute Resolution. Except as provided in Subsection 9(d) hereof, any controversy, claim, or dispute arising out of or relating to the making, performance, breach, termination, expiration, application, or meaning of this Agreement shall be resolved exclusively

5

by arbitration before the American Arbitration Association in Minneapolis, Minnesota, pursuant to the American Arbitration Association’s rules then in effect.

          (a) The decision of the arbitrator(s) shall be final and binding on both parties. Judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. In the event of submission of any dispute to arbitration, each party shall, not later than thirty (30) days prior to the date set for hearing, provide to the other party and to the arbitrator(s) a copy of all exhibits upon which the party intends to rely at the hearing and a list of all persons whom the party intends to call as witnesses at the hearing.

          (b) The arbitrator(s) shall strictly adhere to the sole and exclusive remedy set forth in section 8 hereof and may not award or assess punitive damages against either party.

          (c) Each party shall bear its own costs and expenses of the arbitration and one-half (¹/2) of the fees and costs of the arbitrator(s).

          (d) This section 9 shall have no application to claims by the Company asserting violation of or seeking to enforce, by injunction or otherwise, the terms of sections 5 or 6 hereof. Such claims may be maintained by the Company in a lawsuit in a court of competent jurisdiction.

     8. Modification; Waiver. No provisions of this Agreement may be modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in a writing signed by the Employee and such officer as may be specifically designated by the Board of Directors of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.

     9. Notice. All notices, requests, demands, and all other communications required or permitted by either party to the other party by this Agreement (including, without limitation, any notice of termination of employment) shall be in writing and shall be deemed to have been duly given when delivered personally or received by certified or registered mail, return receipt requested, postage prepaid, at the address of the other party as first written above (directed to the attention of the Board of Directors in the case of the Company). Either party hereto may change its address for purposes of this section 11 by giving fifteen (15) days’ prior written notice to the other party hereto.

     10. Severability. If any term or provision of this Agreement or the application hereof to any person or circumstances shall to any extent be invalid or unenforceable, the remainder of this Agreement or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable shall not be effected thereby, and each term and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law.

     11. Governing Law. This Agreement has been executed and delivered in the State of Minnesota and shall in all respects be governed by, and construed and enforced in accordance

6

with, the laws of the State of Minnesota, including all matters of construction, validity, and performance.

     12. Effect of Agreement; Entire Agreement. The Company and the Employee understand and agree that this Agreement is intended to reflect their agreement only with respect to the subject matter hereof and is not intended to create any obligation on the part of either party to continue employment. This Agreement supersedes any and all other oral or written agreements or policies made relating to the subject matter hereof and constitutes the entire agreement of the parties relating to the subject matter hereof; provided that this Agreement shall not supersede or limit in any way the Employee’s rights under any benefit plan, program, or arrangements in accordance with their terms.

     IN WITNESS WHEREOF, the Company and the Employee have executed this Agreement as of the date first written above.

Restore Medical, Inc. (a/k/a Pi Medical, Inc.)

By	/s/ Susan L. Critzer	/s/ Edward W. Numainville
	Susan Critzer, its President	Edward W. Numainville

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AMENDMENT AGREEMENT

     For good and valuable consideration, the sufficiency and receipt of which is hereby acknowledged, Restore Medical, Inc., 2800 Patton Road, St. Paul, MN 55113 and Edward W. Numainville hereby agree to amend the December 19, 2002 Change In Control Agreement between the parties as follows:

In paragraph 1, “Term of Agreement”, the last sentence of the paragraph is amended to read, “This Agreement will expire on December 31, 2006.”

The December 19, 2002 Change In Control Agreement is unchanged in all other respects.

Agreed to by:

RESTORE MEDICAL, INC		EDWARD W. NUMAINVILLE
By:	/s/ Susan Critzer	By:	/s/ Edward W. Numainville
	Susan Critzer, its CEO		Edward W. Numainville, personally
Date: April 27, 2004		Date: April 29, 2004

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EX-10.5 12 c01111s1exv10w5.htm SEPARATION AGREEMENT

Exhibit 10.5

SEPARATION AGREEMENT

     This Separation Agreement and Mutual Release (“Agreement”) is made and entered into by and between Restore Medical Inc. (“RMI”), a Delaware corporation located at 2800 Patton Road, St. Paul, Minnesota 55113 and Susan L. Critzer (“Critzer”) who resides at 9 Spyglass, Dellwood, Minnesota 55110.

WITNESSETH:

     WHEREAS, Critzer is the President and Chief Executive Officer of RMI;

     WHEREAS, RMI and Critzer have mutually agreed to the terms related to the termination of Critzer’s employment with RMI effective as of December 31, 2004, or upon an alternative mutually agreed upon date following RMI’s hiring of a new President and Chief Executive Officer, whichever is later;

     WHEREAS, this Agreement is intended to replace and supercede that certain Change in Control and Severance Agreement dated March 30, 2004, by and between RMI and Critzer;

     NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth in this Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged,

     IT IS AGREED, by and between the undersigned, as follows:

     1. Separation from Employment. Effective as of December 31, 2004, or upon an alternative mutually agreed upon date following RMI’s hiring of a new President and Chief Executive Officer, whichever is later (the “Separation Date”), Critzer’s employment with RMI will terminate. Following the Separation Date, all Critzer’s benefits and privileges of employment will end except as provided in Paragraph 3 of this Agreement. Critzer and RMI further agree that the Change in Control and Severance Agreement dated March 30, 2004, by and between RMI and Critzer is terminated and superceded by this Agreement and is null and void.

     2. Critzer’s Transition Assistance Duties Prior to the Separation Date. Prior to the Separation Date, Critzer will continue to perform her duties as President and CEO of RMI and, upon the hiring of a new President and Chief Executive Officer, her duties shall be to assist in the new President and CEO’s orientation, to facilitate a smooth transition, and to perform any and all other duties as she may be directed to do from time to time by RMI’s Board of Directors.

     Prior to the Separation Date, RMI shall continue to pay Critzer her current Base Salary (annualized at $315,000/year as of the date of this Agreement) in periodic installments in accordance with the standard payroll practices of RMI in effect from time to time, and Critzer shall continue to be entitled to all benefits currently provided to her as a full-time employee of RMI up through the Separation Date.

     3. Payments and Benefits to Critzer. Provided this Agreement is executed and Critzer has not revoked and/or rescinded it in accordance with Paragraph 7, RMI will provide the following payments and benefits to Critzer:

(a)	Following the Separation Date, RMI shall pay Critzer $315,000 subject to usual payroll withholding, to be paid in approximately equal periodic installments over twelve months in accordance with the standard payroll practices of RMI in effect from time to time, commencing with the first payment on January 15, 2005, and the last payment on December 31, 2005) or upon an alternative mutually agreed upon schedule. In addition, Critzer shall participate in any bonus plan offered to other executives or managers of RMI during her employment. A bonus to be paid to her under said plan shall be pro rated for the period of her employment and shall be paid within 30 days after her employment ends.
(b)	Effective as of the Separation Date, RMI agrees to provide Critzer and her current family members with continued group health coverage, including medical and dental coverage, as otherwise required under applicable stated continuation law and the Consolidated Omnibus Budget Reconciliation Act of 1986, 29 U.S.C. §§ 1161-1168; 26 U.S.C. § 4980B(f), as amended, and all applicable regulations (referred to collectively as “COBRA”). RMI will pay the total applicable premium cost for such medical and dental COBRA continuation coverage for Critzer and her family for a period of up to 12 months commencing on the Separation Date provided, however, that RMI’s obligation to pay for such premiums shall terminate if (i) Critzer or her husband becomes covered under another company’s like benefit plan; (ii) Critzer is eligible (whether or not covered) under Medicare; or (iii) Critzer dies. After expiration of the 12 month period in which RMI pays the above-described premiums, if necessary, Critzer will be responsible for payment of such premiums for as long a period as is allowable under applicable law (for purposes of calculating the total continuation coverage period under COBRA such coverage period shall commence as of the Separation Date).
(c)	Effective as of the Separation Date, RMI agrees to continue to pay Critzer’s group term life insurance premiums for a period of twelve months with the payment of such premiums and such coverage terminating on December 31, 2005, or upon an alternative mutually agreed upon date;
(d)	Pursuant to the terms and conditions set forth in Critzer’s applicable stock option agreements with RMI, RMI agrees that, notwithstanding anything to the contrary set forth in such stock option agreements or RMI’s 1999 Omnibus Stock Plan, as amended, during the five-year period following the Separation Date, Critzer shall be permitted to exercise 100% of all stock options granted to Critzer prior to March 30, 2004 (i.e., 150,000 shares of RMI common stock) and 50% of all options granted on or after

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March 30, 2004 (i.e., 126,000 shares of RMI common stock). The parties hereto agree and acknowledge that, with respect to any stock options previously granted to Critzer that were intended by the parties to be treated as “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, such stock options, to the extent they may be exercised by Critzer more than 90 days following the Separation Date shall be treated as non-qualified stock options, notwithstanding any provision in Critzer’s stock option agreements to the contrary.

     4. Continuing Obligations Under Nondisclosure and Noncompetition Agreement. Critzer acknowledges and agrees that in the course of her employment with RMI, she has had access to confidential information and trade secrets relating to the business affairs of RMI and/or related companies and entities. Critzer agrees that all terms of the Nondisclosure and Noncompetition Agreement between RMI and her attached hereto as Exhibit A shall continue in full force and effect in accordance with its terms and shall not be limited, superceded or in another way affected by this Agreement.

     5. Return of Proprietary Company Property and Other Company Property. Critzer agrees that all property in her possession belonging to RMI, including without limitation, all documents, reports, manuals, memoranda, computer print-outs, customer lists, credit cards, keys, identification, products, access cards, and all other property relating in any way to the business of RMI are the exclusive property of RMI, even if Critzer authored, created or assisted in authoring or creating such property. Critzer agrees that he shall return to RMI all such documents and property prior to the Separation Date in order to be eligible to receive the benefits described in Paragraph 3 of this Agreement. Notwithstanding the foregoing, Critzer shall be permitted to keep her cellular phone, phone number, and phone account. Such cell phone account shall be transferred to Critzer personally on or about the Separation Date. Critzer agrees to accept such transfer or RMI may cancel such cell phone account. Following such transfer, Critzer shall be responsible for all cell phone charges.

     6. Acceptance Period. The terms of this Agreement will be open for acceptance by Critzer for a period of 21 calendar days (“the Acceptance Period”) during which time she may consider whether or not to accept this Agreement and seek counsel to advise her regarding this Agreement. Critzer agrees that any changes to this Agreement, material or immaterial during the Acceptance Period, will not restart the Acceptance Period. Critzer further understands that she is not required to take the entire 21-day period to decide whether she wishes to execute this Agreement and that she may do so on an accelerated basis without prejudice to her own or RMI’s rights under this Agreement.

     7. Right to Revoke and Rescind. Critzer has the right to revoke or rescind this Agreement within 15 calendar days following her signing of it.

     Any revocation or rescission of this Agreement must be in writing and hand-delivered to RMI, or, if sent by mail, postmarked within the applicable time period and sent by certified mail, return receipt requested. Any revocation or rescission must be delivered or sent to the following

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address: Mark Knudson, Executive Chairman, Board of Directors, Restore Medical Inc., 2800 Patton Road, St. Paul, Minnesota, 55113.

     In the event that Critzer revokes or rescinds (that is cancels) this Agreement, it shall be null and void and neither Critzer nor RMI shall have any rights or obligations under this Agreement.

     8. Critzer’s Release of RMI. In exchange for the payments and benefits specified in this Agreement, Critzer, for and on behalf of herself and her heirs, administrators, executors, successors and assigns, agrees to, and hereby does, release, acquit, and forever discharge RMI and its affiliates, subsidiaries, and related companies, and the former, current, and future directors, officers, members, agents, attorneys, servants, independent contractors and employees (the “Released Parties”), from any and all claims, whether direct or indirect, fixed or contingent, known or unknown, which Critzer ever had, has, or may claim to have, for, upon, or by reason of any matter, act or thing up through the date of his execution of this Agreement, including but not limited to: any cause of action Critzer could have asserted in any litigation against any of the Released Parties; any cause of action or claim relating to Critzer’s association with or employment by RMI; any cause of action relating to any statements or actions by any of the Released Parties; and/or any cause of action or claim relating to the termination of Critzer’s employment.

     This General Release specifically encompasses, but is not limited to, claims that could be brought under Title VII, 42 U.S.C. § 2000(e) et seq., as amended by the Civil Rights Act of 1991; the Age Discrimination in Employment Act (including the Older Workers Benefit Protection Act), 29 U.S.C. § 621 et seq.; the Americans With Disabilities Act, 42 U.S.C. §§ 12101-12213; the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1001, et seq.; the Fair Labor Standards Act, 29 U.S.C. § 201, et seq.; the National Labor Relations Act, 29 U.S.C. § 151, et seq., the Worker Adjustment Retraining and Notification Act, 29 U.S.C. § 2101, et seq., the Family Medical Leave Act, 29 U.S.C. § 2601 et seq., the Minnesota Human Rights Act, Minn. Stat. § 363.01, et seq., Minn. Stat. § 181.01 et seq., Minn. Stat. § 176.82, any other statutes providing rights and protections of any kind for employees working in the state of Minnesota, and any other federal or state statute, or local ordinance, including any claims for attorneys’ fees, liquidated damages, punitive damages, costs or disbursements that could be awarded in connection with these or any other statutory claims.

     This General Release also specifically encompasses any and all claims grounded in contract or tort theories, including, but not limited to: breach of contract; tortious interference with contractual relations; promissory estoppel; breach of the implied covenant of good faith and fair dealing; breach of employee handbooks, manuals or other policies; wrongful discharge; wrongful discharge in violation of public policy; assault; battery; fraud; false imprisonment; invasion of privacy; intentional or negligent misrepresentation; defamation, including libel and slander, discharge defamation and self-defamation; intentional or negligent infliction of emotional distress; negligence; breach of fiduciary duty; negligent hiring, retention or supervision; whistleblower claims; and/or any other contract or tort theory based on either intentional or negligent conduct of any kind, including any attorneys’ fees, liquidated damages, punitive damages, costs or disbursements that could be awarded in connection with these or any other common law claims.

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     Critzer understands and agrees that she is not releasing or waiving her right to receive any vested benefits to which she is entitled under RMI’s 401(k) plan. Her rights to receive benefits under RMI’s 401(k) plan, if any, shall be governed by the terms of the plan, and nothing in this Agreement is intended to alter the terms of that plan.

     Notwithstanding the foregoing, Critzer does not release any statutory or other rights she may have to be indemnified for or to be defended against any claims that may be brought against her as a result of acts she allegedly undertook or failed to undertake during her employment with RMI.

     9. RMI’s Release of Critzer. RMI and its affiliates, subsidiaries, and related companies, and their former, current, and future owners, shareholders, directors, officers, members, agents, insurers, assigns, representatives, attorneys, servants, independent contractors and employees hereby does release, acquit, and forever discharge Critzer and her attorneys, agents, personal representatives, heirs, and assigns (“the Released Critzer Parties”), of and from any and all actions, causes of action, liabilities, suits, debts, sums of money, accounts, bonds, bills, covenants, contracts, controversies, agreements, guaranties, promises, damages, judgments, claims and demands whatsoever, in law or in equity, whether direct or indirect, fixed or contingent, known or unknown, asserted or unasserted, suspected or unsuspected, which RMI may now have or hereafter have or claim to have against the Released Critzer Parties arising up through the date of her signature on this Agreement.

     10. Confidentiality. Critzer agrees to keep the terms of this Agreement confidential. Critzer agrees not to disclose any information concerning this Agreement to any person, including any present or former employees of RMI. These confidentiality provisions are subject to the following exceptions: Critzer may disclose this Agreement to her attorneys, accountants, tax advisors or spouse or in the course of legal proceedings involving RMI, or in response to a court order, subpoena or inquiry by a government agency. RMI agrees to keep this Agreement confidential except that it may disclose the contents of this Agreement to those with a business need to know and as required by law.

     11. No Admission. This Agreement is not an admission by RMI that it has acted wrongfully toward Critzer or anyone else, and shall not be interpreted as such.

     12. No Assignment. This Agreement is personal to Critzer and may not be assigned by her. The payments to be provided to Critzer as set forth in Paragraph 3 of this Agreement shall be made to Critzer’s estate in the event of Critzer’s death prior to Critzer’s receipt of such payments.

     13. Governing Law; Severability. This Agreement shall be governed by the laws of the State of Minnesota. If any part of this Agreement is construed to be in violation of any law, such part shall be modified to achieve the objective of the parties to the fullest extent permitted and the balance of this Agreement shall remain in full force and effect.

     14. Entire Agreement. Critzer agrees that this Agreement, and all agreements referenced in this Agreement (i.e., the “Nondisclosure and Noncompetition Agreement”) except for those expressly revoked herein (i.e., the “Change in Control and Severance Agreement dated

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March 30, 2004”), contains the entire agreement between Critzer and RMI with respect to Critzer’s employment and separation from employment and that there are no promises or understandings outside of this Agreement with respect to Critzer’s employment or Critzer’s separation from employment with RMI. Any modification of or addition to this Agreement must be in a writing signed by Critzer and RMI.

     15. Venue. Any action at law, suit in equity, or judicial proceeding arising directly, indirectly, or otherwise in connection with, out of, related to or from this Agreement or any provision hereof, shall be litigated only in the federal or state courts of the State of Minnesota, and Critzer waives any right she may have to transfer or change the venue of any litigation brought against Critzer by RMI.

     16. Waivers. No failure on the part of either party to exercise, and no delay in exercising, any right or remedy pursuant to this Agreement shall operate as a waiver thereof; nor shall any single or partial exercise of any right or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right or remedy granted hereby or by an related document or by law.

     17. Captions and Headings. The captions and section headings used in this Agreement are for convenience of reference only, and shall not affect the construction or interpretation of this Agreement or any of the provisions hereof.

     18. Counterparts. This Agreement may be simultaneously executed in any number of counterparts, and such counterparts executed and delivered, each as an original, shall constitute but one in the same instrument.

     19. Acknowledgement. CRITZER AFFIRMS THAT SHE HAS READ THIS AGREEMENT. CRITZER IS HEREBY ADVISED TO CONSULT WITH AN ATTORNEY PRIOR TO SIGNING THIS AGREEMENT. CRITZER AGREES THAT THE PROVISIONS OF THIS AGREEMENT ARE UNDERSTANDABLE TO HER AND THAT SHE HAS ENTERED INTO THIS AGREEMENT FREELY AND VOLUNTARILY.

Dated:          August 13, 2004	/s/ Susan L. Critzer
	Susan L. Critzer

Dated:          August 13, 2004	RESTORE MEDICAL INC.
	By /s/ Mark B. Knudson
	Its Executive Chair

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EX-10.6 13 c01111s1exv10w6.htm AMENDMENT TO SEPARATION AGREEMENT

Exhibit 10.6

Amendment
to
Separation Agreement dated August 13, 2004
between Restore Medical Inc. and Susan L. Critzer

     Pursuant to Paragraph 14 of the Separation Agreement between Restore Medical Inc. (“RMI”) and Susan L. Critzer (“Critzer”) dated August 13, 2004 (“Separation Agreement”), RMI and Critzer agree pursuant to this Amendment to Separation Agreement (“Amendment Agreement”) that Section 1 and Section 3(d) shall be amended as set forth below:

     1. Separation from Employment. Effective as of June 30, 2005, or upon an alternative mutually agreed upon date for the termination of Critzer’s employment from RMI, whichever is earlier; or upon the date of an involuntary termination of Critzer’s employment by RMI, if any; or upon the date of Critzer’s unilateral resignation from RMI, if any (all such alternative dates may be the “Separation Date”), Critzer’s employment with RMI will terminate. Following the Separation Date, all Critzer’s benefits and privileges of employment will end except as provided in Paragraph 3 of the Separation Agreement as amended by the Amendment Agreement. Critzer and RMI further agree that the Change in Control and Severance Agreement dated March 30, 2004, by and between RMI and Critzer is terminated and superceded by this Agreement and is null and void.

     3. Payments and Benefits to Critzer. Provided this Agreement is executed and Critzer has not revoked and/or rescinded it in accordance with Paragraph 7, RMI will provide the following payments and benefits to Critzer:

(d) Pursuant to the terms and conditions set forth in Critzer’s applicable stock option agreements with RMI, RMI agrees that, notwithstanding anything to the contrary set forth in such stock option agreements or RMI’s 1999 Omnibus Stock Plan, as amended, during the five-year period following the Separation Date, Critzer shall be permitted to exercise 100% of all stock options granted to Critzer prior to December 31, 2004, and not yet exercised (i. e., 502,000 shares of RMI common stock); provided, however, in the event Critzer unilaterally resigns from RMI prior to June 30, 2005, and prior to RMI’s hiring of a new President and Chief Executive Officer and Critzer’s completion of her transition assistance duties described in Paragraph 2 of this Agreement, during the five-year period following the Separation Date, Critzer shall be permitted to exercise 100% of all stock options granted to Critzer prior to March 30, 2004 (i.e., 150,000 shares of RMI common stock) and 50% of all options granted on or after March 30, 2004 (i.e., 176,000 shares of RMI common stock). The parties hereto agree and acknowledge that, with respect to any stock options previously granted to Critzer that were intended by the parties to be treated as “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, such stock options, to the extent they may be exercised by Critzer more than 90 days following the Separation Date shall be treated as non-qualified stock

options, notwithstanding any provision in Critzer’s stock option agreements to the contrary

Dated:          February 2, 2005	/s/ Susan L. Critzer
	Susan L. Critzer

Dated:          February 2, 2005	RESTORE MEDICAL INC.
	By /s/ Mark B. Knudson
	Its Chair Person

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EX-10.7 14 c01111s1exv10w7.htm 1999 OMNIBUS STOCK PLAN

Exhibit 10.7

RESTORE MEDICAL, INC.
1999 OMNIBUS STOCK PLAN

Section 1. Purpose.

     The purpose of this Plan is to promote the interests of the Company and its stockholders by aiding the Company in attracting, retaining and incentivizing employees, officers, consultants, independent contractors and non-employee directors.

Section 2. Definitions.

     As used in the Plan, the following terms shall have the meanings set forth below:

     (a) “Affiliate” shall mean (i) any entity that, directly or indirectly through one or more intermediaries, is controlled by the Company and (ii) any entity in which the Company has a significant equity interest, in each case as determined by the Committee.

     (b) “Award” shall mean any Option, Stock Appreciation Right, Restricted Stock, Restricted Stock Unit, Performance Award, Dividend Equivalent, Other Stock Grant or Other Stock-Based Award granted under the Plan.

     (c) “Award Agreement” shall mean any written agreement, contract or other instrument or document evidencing any Award granted under the Plan.

     (d) “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time, and any regulations promulgated thereunder.

     (e) “Committee” shall mean either the Board of Directors of the Company or a committee of the Board of Directors appointed by the Board of Directors to administer the Plan. The Company expects to have the Plan administered in accordance with the requirements for the award of “qualified performance-based compensation” within the meaning of Section 162(m) of the Code.

     (f) “Company” shall mean Restore Medical, Inc., a Delaware corporation, and any successor corporation.

     (g) “Dividend Equivalent” shall mean any right granted under Section 6(e) of the Plan.

     (h) “Eligible Person” shall mean any employee, officer, consultant, independent contractor or director providing services to the Company or any Affiliate whom the Committee determines to be an Eligible Person.

     (i) “Fair Market Value” shall mean, with respect to any property (including, without limitation, any Shares or other securities), the fair market value of such property determined by such methods or procedures as shall be established from time to time by the Committee. Notwithstanding the foregoing, unless otherwise determined by the Committee, the Fair Market

Value of Shares on a given date for purposes of the Plan shall not be less than (i) the closing price as reported for composite transactions, if the Shares are then listed on a national securities exchange, (ii) the last sale price, if the Shares are then quoted on the Nasdaq National Market or (iii) the average of the closing representative bid and asked prices of the Shares in all other cases, on the date as of which fair market value is being determined. If on a given date the Shares are not traded in an established securities market, the Committee shall make a good faith attempt to satisfy the requirements of this clause and in connection therewith shall take such action as it deems necessary or advisable.

     (j) “Incentive Stock Option” shall mean an option granted under Section 6(a) of the Plan that is intended to meet the requirements of Section 422 of the Code or any successor provision.

     (k) “Non-Qualified Stock Option” shall mean an option granted under Section 6(a) of the Plan that is not intended to be an Incentive Stock Option.

     (l) “Option” shall mean an Incentive Stock Option or a Non-Qualified Stock Option, and shall include Reload Options.

     (m) “Other Stock Grant” shall mean any right granted under Section 6(f) of the Plan.

     (n) “Other Stock-Based Award” shall mean any right granted under Section 6(g) of the Plan.

     (o) “Participant” shall mean an Eligible Person designated to be granted an Award under the Plan.

     (p) “Performance Award” shall mean any right granted under Section 6(d) of the Plan.

     (q) “Person” shall mean any individual, corporation, partnership, association or trust.

     (r) “Plan” shall mean the Restore Medical, Inc. 1999 Omnibus Stock Plan, as amended from time to time.

     (s) “Reload Option” shall mean any Option granted under Section 6(a)(iv) of the Plan.

     (t) “Restricted Stock” shall mean any Shares granted under Section 6(c) of the Plan.

     (u) “Restricted Stock Unit” shall mean any unit granted under Section 6(c) of the Plan evidencing the right to receive a Share (or a cash payment equal to the Fair Market Value of a Share) at some future date.

     (v) “Shares” shall mean shares of Common Stock, $0.01 par value, of the Company or such other securities or property as may become subject to Awards pursuant to an adjustment made under Section 4(c) of the Plan.

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     (w) “Stock Appreciation Right” shall mean any right granted under Section 6(b) of the Plan.

Section 3. Administration.

     (a) Power and Authority of the Committee. The Plan shall be administered by the Committee. Subject to the express provisions of the Plan and to applicable law, the Committee shall have full power and authority to: (i) designate Participants; (ii) determine the type or types of Awards to be granted to each Participant under the Plan; (iii) determine the number of Shares to be covered by (or with respect to which payments, rights or other matters are to be calculated in connection with) each Award; (iv) determine the terms and conditions of any Award or Award Agreement; (v) amend the terms and conditions of any Award or Award Agreement and accelerate the exercisability of Options or the lapse of restrictions relating to Restricted Stock, Restricted Stock Units or other Awards; (vi) determine whether, to what extent and under what circumstances Awards may be exercised in cash, Shares, other securities, other Awards or other property, or canceled, forfeited or suspended; (vii) determine whether, to what extent and under what circumstances cash, Shares, other securities, other Awards, other property and other amounts payable with respect to an Award under the Plan shall be deferred either automatically or at the election of the holder thereof or the Committee; (viii) interpret and administer the Plan and any instrument or agreement relating to, or Award made under, the Plan; (ix) establish, amend, suspend or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (x) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations and other decisions under or with respect to the Plan or any Award shall be within the sole discretion of the Committee, may be made at any time and shall be final, conclusive and binding upon any Participant, any holder or beneficiary of any Award.

     (b) Delegation. The Committee may delegate its powers and duties under the Plan to one or more officers of the Company or any Affiliate or a committee of such officers, subject to such terms, conditions and limitations as the Committee may establish in its sole discretion.

Section 4. Shares Available for Awards.

     (a) Shares Available. Subject to adjustment as provided in Section 4(c), the aggregate number of Shares that may be issued under all Awards under the Plan shall be 3,875,000. Shares to be issued under the Plan shall be newly issued. If any Shares covered by an Award or to which an Award relates are not purchased or are forfeited, or if an Award otherwise terminates without delivery of any Shares, then the number of Shares counted against the aggregate number of Shares available under the Plan with respect to such Award, to the extent of any such forfeiture or termination, shall again be available for granting Awards under the Plan. Notwithstanding the foregoing, the number of Shares available for granting Incentive Stock Options under the Plan shall not exceed 3,875,000, subject to adjustment as provided in the Plan and Section 422 or 424 of the Code or any successor provision.

     (b) Accounting for Awards. For purposes of this Section 4, if an Award entitles the holder thereof to receive or purchase Shares, the number of Shares covered by such Award or to

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which such Award relates shall be counted on the date of grant of such Award against the aggregate number of Shares available for granting Awards under the Plan.

     (c) Adjustments. In the event that the Committee shall determine that any dividend or other distribution (whether in the form of cash, Shares, other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of Shares or other securities of the Company, issuance of warrants or other rights to purchase Shares or other securities of the Company or other similar corporate transaction or event affects the Shares such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number and type of Shares (or other securities or other property) that thereafter may be made the subject of Awards, (ii) the number and type of Shares (or other securities or other property) subject to outstanding Awards and (iii) the purchase or exercise price with respect to any Award; provided, however, that the number of Shares covered by any Award or to which such Award relates shall always be a whole number.

     (d) Award Limitations Under the Plan. No Eligible Person may be granted any Award or Awards under the Plan, the value of which Awards is based solely on an increase in the value of the Shares after the date of grant of such Awards, for more than 100,000 Shares (subject to adjustment as provided for in Section 4(c)), in the aggregate in any calendar year. The foregoing annual limitation specifically includes the grant of any Awards representing “qualified performance-based compensation” within the meaning of Section 162(m) of the Code.

Section 5. Eligibility.

     Any Eligible Person of the Company or any Affiliate, shall be eligible to be designated a Participant. In determining which Eligible Persons shall receive an Award and the terms of any Award, the Committee may take into account the nature of the services rendered by the respective Eligible Persons, their present and potential contributions to the success of the Company or such other factors as the Committee, in its discretion, shall deem relevant. Notwithstanding the foregoing, an Incentive Stock Option may only be granted to full or part-time employees (which term as used herein includes, without limitation, officers and directors who are also employees), and an Incentive Stock Option shall not be granted to an employee of an Affiliate unless such Affiliate is also a “subsidiary corporation” of the Company within the meaning of Section 424(f) of the Code or any successor provision.

Section 6. Awards.

     (a) Options. The Committee is hereby authorized to grant Options to Participants with the following terms and conditions and with such additional terms and conditions not inconsistent with the provisions of the Plan as the Committee shall determine:

     (i) Exercise Price. The purchase price per Share purchasable under an Option shall be determined by the Committee; provided, however, that the purchase price of an

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Incentive Stock Option shall not be less than 100% of the Fair Market Value of a Share on the date of grant of such Option.

     (ii) Option Term. The term of each Option shall be fixed by the Committee; provided, however, that the term of an Incentive Stock Option may not extend more than ten years from the date of grant of such Incentive Stock Option.

     (iii) Time and Method of Exercise. The Committee shall determine the time or times at which an Option may be exercised in whole or in part and the method or methods by which, and the form or forms (including, without limitation, cash, Shares, other securities, other Awards or other property, or any combination thereof, having a Fair Market Value on the exercise date equal to the relevant exercise price; provided, however, Options granted to employees shall not include “cash-less” exercise provisions) in which, payment of the exercise price with respect thereto may be made or deemed to have been made.

     (iv) Reload Options. The Committee may grant Reload Options, separately or together with another Option, pursuant to which, subject to the terms and conditions established by the Committee, the Participant would be granted a new Option when the payment of the exercise price of a previously granted option is made by the delivery of Shares owned by the Participant pursuant to Section 6(a)(iii) hereof or the relevant provisions of another plan of the Company, and/or when Shares are tendered or forfeited as payment of the amount to be withheld under applicable income tax laws in connection with the exercise of an Option, which new Option would be an Option to purchase the number of Shares not exceeding the sum of (A) the number of Shares so provided as consideration upon the, exercise of the previously granted option to which such Reload Option relates and (B) the number of Shares, if any, tendered or withheld as payment of the amount to be withheld under applicable tax laws in connection with the exercise of the option to which such Reload Option relates pursuant to the relevant provisions of the plan or agreement relating to such option. Reload Options may be granted with respect to Options previously granted under the Plan or any other stock option plan of the Company, and may be granted in connection with any Option granted under the Plan or any other stock option plan of the Company at the time of such grant. Such Reload Options shall have a per share exercise price equal to the Fair Market Value as of the date of grant of the new Option. Any Reload Option shall be subject to availability of sufficient Shares for grant under the Plan. Shares surrendered as part or all of the exercise price of the Option to which it relates that have been owned by the optionee less than six months will not be counted for purposes of determining the number of Shares that may be purchased pursuant to a Reload Option.

     (v) Ten Percent Shareholder Rule. Notwithstanding any other provision in the Plan, if at the time an Option is otherwise to be granted pursuant to the Plan to a Participant who owns, directly or indirectly (within the meaning of Section 424(d) of the Code), Common Stock of the Company possessing more than 10% of the total combined voting power of all classes of stock of the Company or its parent or any subsidiary, then any Incentive Stock Option to be granted to such Participant pursuant to the Plan shall satisfy the requirements of Section 422(c)(5) of the Code, and the exercise price of such

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Option shall be not less than 110% of the Fair Market Value of the Shares covered, and such Option by its terms shall not be exercisable after the expiration of five years from the date such Option is granted.

     (b) Stock Appreciation Rights. The Committee is hereby authorized to grant Stock Appreciation Rights to Participants subject to the terms of the Plan and any applicable Award Agreement. A Stock Appreciation Right granted under the Plan shall confer on the holder thereof a right to receive upon exercise thereof the excess of (i) the Fair Market Value of one Share on the date of exercise (or, if the Committee shall so determine, at any time during a specified period before or after the date of exercise) over (ii) the grant price of the Stock Appreciation Right as specified by the Committee, which price shall not be less than 100% of the Fair Market Value of one Share on the date of grant of the Stock Appreciation Right. Subject to the terms of the Plan and any applicable Award Agreement, the grant price, term, methods of exercise, dates of exercise, methods of settlement and any other terms and conditions of any Stock Appreciation Right shall be as determined by the Committee. The Committee may impose such conditions or restrictions on the exercise of any Stock Appreciation Right as it may deem appropriate.

     (c) Restricted Stock and Restricted Stock Units. The Committee is hereby authorized to grant Restricted Stock and Restricted Stock Units to Participants with the following terms and conditions and with such additional terms and conditions not inconsistent with the provisions of the Plan as the Committee shall determine:

     (i) Restrictions. Shares of Restricted Stock and Restricted Stock Units shall be subject to such restrictions as the Committee may impose (including, without limitation, a waiver by the Participant of the right to vote or to receive any dividend or other right or property with respect thereto), which restrictions may lapse separately or in combination at such time or times, in such installments or otherwise as the Committee may deem appropriate.

     (ii) Stock Certificates. Any Restricted Stock shall be registered in the name of the Participant and shall bear an appropriate legend referring to the terms, conditions and restrictions applicable to such Restricted Stock. In the case of Restricted Stock Units, no Shares shall be issued at the time such Awards are granted.

     (iii) Forfeiture. Except as otherwise determined by the Committee, upon termination of employment (as determined under criteria established by the Committee) during the applicable restriction period, all Shares of Restricted Stock and all Restricted Stock Units at such time subject to restriction shall be forfeited and reacquired by the Company; provided, however, that the Committee may, when it finds that a waiver would be in the best interest of the Company, waive in whole or in part any or all remaining restrictions with respect to Shares of Restricted Stock or Restricted Stock Units. Upon the lapse or waiver of restrictions and the restricted period relating to Restricted Stock Units evidencing the right to receive Shares, such Shares shall be issued and delivered to the holders of the Restricted Stock Units.

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     (d) Performance Awards. The Committee is hereby authorized to grant Performance Awards to Participants subject to the terms of the Plan and any applicable Award Agreement. A Performance Award granted under the Plan (i) may be denominated or payable in cash, Shares (including, without limitation, Restricted Stock and Restricted Stock Units), other securities, other Awards or other property and (ii) shall confer on the holder thereof the right to receive payments, in whole or in part, upon the achievement of such performance goals during such performance periods as the Committee shall establish. Subject to the terms of the Plan and any applicable Award Agreement, the performance goals to be achieved during any performance period, the length of any performance period, the amount of any Performance Award granted, the amount of any payment or transfer to be made pursuant to any Performance Award and any other terms and conditions of any Performance Award shall be determined by the Committee.

     (e) Dividend Equivalents. The Committee is hereby authorized to grant Dividend Equivalents to Participants, subject to the terms of the Plan and any applicable Award Agreement, under which such Participants shall be entitled to receive payments (in cash, Shares, other securities, other Awards or other property as determined in the discretion of the Committee) equivalent to the amount of cash dividends paid by the Company to holders of Shares with respect to a number of Shares determined by the Committee.

     (f) Other Stock Grants. The Committee is hereby authorized, subject to the terms of the Plan and any applicable Award Agreement, to grant to Participants Shares without restrictions thereon as are deemed by the Committee to be consistent with the purpose of the Plan.

     (g) Other Stock-Based Awards. The Committee is hereby authorized to grant to Participants subject to the terms of the Plan and any applicable Award Agreement, such other Awards that are denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, Shares (including, without limitation, securities convertible into Shares), as are deemed by the Committee to be consistent with the purpose of the Plan. Shares or other securities delivered pursuant to a purchase right granted under this Section 6(g) shall be purchased for such consideration, which may be paid by such method or methods and in such form or forms (including, without limitation, cash, Shares, other securities, other Awards or other property or any combination thereof), as the Committee shall determine.

     (h) General.

     (i) No Cash Consideration for Awards. Awards shall be granted for no cash consideration or for such minimal cash consideration as may be required by applicable law.

     (ii) Awards May Be Granted Separately or Together. Awards may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with or in substitution for any other Award or any award granted under any plan of the Company or any Affiliate other than the Plan. Awards granted in addition to or in tandem with other Awards or in addition to or in tandem with awards granted under any such other plan of the Company or any Affiliate may be granted either at the same time as or at a different time from the grant of such other Awards or awards.

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     (iii) Forms of Payment under Awards. Subject to the terms of the Plan and of any applicable Award Agreement, payments or transfers to be made by the Company or an Affiliate upon the grant, exercise or payment of an Award may be made in such form or forms as the Committee shall determine (including, without limitation, cash, Shares, other securities, other Awards or other property or any combination thereof; provided, however, Options granted to employees shall not include “cash-less” exercise provisions), and may be made in a single payment or transfer, in installments or on a deferred basis, in each case in accordance with rules and procedures established by the Committee. Such rules and procedures may include, without limitation, provisions for the payment or crediting of reasonable interest on installment or deferred payments or the grant or crediting of Dividend Equivalents with respect to installment or deferred payments.

     (iv) Limits on Transfer of Awards. No Award (other than Other Stock Grants) and no right under any such Award shall be transferable by a Participant otherwise than by will or by the laws of descent and distribution; provided, however, that, if so determined by the Committee, a Participant may, in the manner established by the Committee, transfer Options (other than Incentive Stock Options) or designate a beneficiary or beneficiaries to exercise the rights of the Participant and receive any property distributable with respect to any Award upon the death of the Participant. Each Award or right under any Award shall be exercisable during the Participant’s lifetime only by the Participant or, if permissible under applicable law, by the Participant’s guardian or legal representative. No Award or right under any such Award may be pledged, alienated, attached or otherwise encumbered, and any purported pledge, alienation, attachment or encumbrance thereof shall be void and unenforceable against the Company or any Affiliate.

     (v) Term of Awards. The term of each Award shall be for such period as may be determined by the Committee.

     (vi) Restrictions; Securities Exchange Listing. All Shares or other securities delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such restrictions as the Committee may deem advisable under the Plan, applicable federal or state securities laws and regulatory requirements, and the Committee may cause appropriate entries to be made or legends to be affixed to reflect such restrictions. If the Shares or other securities are listed on a securities exchange, the Company shall not be required to deliver any Shares or other securities covered by an Award until such Shares or other securities have been listed on such securities exchange.

Section 7. Amendment and Termination; Adjustments.

     Except to the extent prohibited by applicable law and unless otherwise expressly provided in an Award Agreement or in the Plan:

     (a) Amendments to the Plan. The Board of Directors of the Company may amend, alter, suspend, discontinue or terminate the Plan; provided, however, that, notwithstanding any other provision of the Plan or any Award Agreement, without the approval of the shareholders of

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the Company, no such amendment, alteration, suspension, discontinuation or termination shall be made that, absent such approval:

     (i) would cause Rule 16b-3 or Section 162(m) of the Code to become unavailable with respect to the Plan;

     (ii) would violate the rules or regulations of the NASDAQ National Market, any other securities exchange or the National Association of Securities Dealers, Inc. that are applicable to the Company; or

     (iii) would cause the Company to be unable, under the Code, to grant Incentive Stock Options under the Plan.

     (b) Amendments to Awards. The Committee may waive any conditions of or rights of the Company under any outstanding Award, prospectively or retroactively. The Committee may not amend, alter, suspend, discontinue or terminate any outstanding Award, prospectively or retroactively, without the consent of the Participant or holder or beneficiary thereof, except as otherwise herein provided or in the Award Agreement.

     (c) Correction of Defects, Omissions and Inconsistencies. The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it shall deem desirable to carry the Plan into effect.

Section 8. Income Tax Withholding; Tax Bonuses.

     (a) Withholding. In order to comply with all applicable federal or state income tax laws or regulations, the Company may take such action as it deems appropriate to ensure that all applicable federal or state payroll, withholding, income or other taxes, which are the sole and absolute responsibility of a Participant are withheld or collected from such Participant. In order to assist a Participant in paying all or a portion of the federal and state taxes to be withheld or collected upon exercise or receipt of (or the lapse of restrictions relating to) an Award, the Committee, in its discretion and subject to such additional terms and conditions as it may adopt, may permit the Participant to satisfy such tax obligation by (i) electing to have the Company withhold a portion of the Shares otherwise to be delivered upon exercise or receipt of (or the lapse of restrictions relating to) such Award with a Fair Market Value equal to the amount of such taxes or (ii) delivering to the Company Shares other than Shares issuable upon exercise or receipt of (or the lapse of restrictions relating to) such Award with a Fair Market Value equal to the amount of such taxes. The election, if any, must be made on or before the date that the amount of tax to be withheld is determined.

     (b) Tax Bonuses. The Committee, in its discretion, shall have the authority, at the time of grant of any Award under this Plan or at any time thereafter, to approve cash bonuses to designated Participants to be paid upon their exercise or receipt of (or the lapse of restrictions relating to) Awards in order to provide funds to pay all or a portion of federal and state taxes due as a result of such exercise or receipt (or the lapse of such restrictions). The Committee shall have full authority in its discretion to determine the amount of any such tax bonus.

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Section 9. General Provisions.

     (a) No Rights to Awards. No Eligible Person, Participant or other Person shall have any claim to be granted any Award under the Plan, and there is no obligation for uniformity of treatment of Eligible Persons, Participants or holders or beneficiaries of Awards under the Plan. The terms and conditions of Awards need not be the same with respect to any Participant or with respect to different Participants.

     (b) Award Agreements. No Participant will have rights under an Award granted to such Participant unless and until an Award Agreement shall have been duly executed on behalf of the Company and, if requested by the Company, signed by the Participant.

     (c) No Limit on Other Compensation Arrangements. Nothing contained in the Plan shall prevent the Company or any Affiliate from adopting or continuing in effect other or additional compensation arrangements, and such arrangements may be either generally applicable or applicable only in specific cases.

     (d) No Right to Employment. The grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of the Company or any Affiliate, nor will it affect in any way the right of the Company or an Affiliate to terminate such employment at any time, with or without cause. In addition, the Company or an Affiliate may at any time dismiss a Participant from employment free from any liability or any claim under the Plan, unless otherwise expressly provided in the Plan or in any Award Agreement.

     (e) Governing Law. The validity, construction and effect of the Plan or any Award, and any rules and regulations relating to the Plan or any Award, shall be determined in accordance with the laws of the State of Minnesota.

     (f) Severability. If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Committee, materially altering the purpose or intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction or Award, and the remainder of the Plan or any such Award shall remain in full force and effect.

     (g) No Trust or Fund Created. Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate and a Participant or any other Person. To the extent that any Person acquires a right to receive payments from the Company or any Affiliate pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Company or any Affiliate.

     (h) No Fractional Shares. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award, and the Committee shall determine whether cash shall be paid in lieu of any fractional Shares or whether such fractional Shares or any rights thereto shall be canceled, terminated or otherwise eliminated.

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     (i) Headings. Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof.

     (j) Other Benefits. No compensation or benefit awarded to or realized by any Participant under the Plan shall be included for the purpose of computing such Participant’s compensation under any compensation-based retirement, disability, or similar plan of the Company unless required by law or otherwise provided by such other plan.

Section 10. Effective Date of the Plan.

     The Plan shall be effective as of the date of its approval and adoption by the Company’s shareholders. If the Company’s shareholders do not approve the Plan, the Plan shall be null and void.

Section 11. Term of the Plan.

     Awards shall only be granted under the Plan during a 10-year period beginning on the effective date of the Plan. However, unless otherwise expressly provided in the Plan or in an applicable Award Agreement, any Award theretofore granted may extend beyond the end of such 10-year period, and the authority of the Committee provided for hereunder with respect to the Plan and any Awards, and the authority of the Board of Directors of the Company to amend the Plan, shall extend beyond the termination of the Plan.

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EX-10.8 15 c01111s1exv10w8.htm STANDARD FORM OF INCENTIVE STOCK OPTION AGREEMENT

Exhibit 10.8

Restore Medical, Inc.
INCENTIVE STOCK OPTION AGREEMENT
Grant ID 0000000000XXX

     THIS AGREEMENT, made as of                                          , by and between Restore Medical, Inc., a Delaware corporation (the “Company”), and                     (“Optionee”).

     WHEREAS, the Company, pursuant to the 1999 Omnibus Stock Plan (the “Plan”), wishes to grant this stock option to Optionee;

     NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained, the parties hereto hereby agree as follows:

     1. Grant of Option. The Company hereby grants to Optionee the right and option (the “Option”) to purchase all or any part of an aggregate of XXXX shares (the “Shares”) of the common stock, par value $.01 per share (the “Common Stock”), of the Company at the price of  $XX.XX  per Share on the terms and conditions set forth herein. It is understood and agreed that such price is not less than 100% of the fair market value of each such Share on the date of this Agreement. The Option is intended to be entitled to treatment as an incentive stock option within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended (the “Code”).

     2. Duration and Exercisability. The Option may not be exercised by Optionee except as set forth below, and the Option shall in all events terminate ten years from the date hereof. Subject to the other terms and conditions set forth herein, the Option shall vest and may be exercised by Optionee in cumulative installments as follows:

     Vesting Schedule:

XXXX on XX/XX/XXXX
XXXX on XX/XX/XXXX
XXXX on XX/XX/XXXX
XXXX on XX/XX/XXXX
XXXX on XX/XX/XXXX
XXXX on XX/XX/XXXX
XXXX on XX/XX/XXXX
XXXX on XX/XX/XXXX

During the lifetime of Optionee, the Option shall be exercisable only by Optionee. The Option shall not be assignable or transferable by Optionee, other than by will or the laws of descent and distribution. The vesting of the Option is subject to acceleration under the circumstances described in Section 4.

     3. Effect of Termination of Relationship with the Company.

     (a) In the event that Optionee shall cease to be employed by the Company or its subsidiaries, for any reason other than Optionee’s gross and willful misconduct or Optionee’s death or disability, Optionee shall have the right to exercise the Option at any time within three months after such termination of employment to the extent of the full number of Shares Optionee was entitled to purchase under the Option on the date of termination, subject to the condition that the Option shall not be exercisable after the expiration of its term.

     (b) In the event that Optionee shall cease to be employed by the Company or its subsidiaries by reason of Optionee’s gross and willful misconduct during the course of his/her employment with the Company (as reasonably determined by the Company), the Option shall terminate as of the date of the misconduct and shall not be exercisable thereafter.

     (c) If Optionee shall die while employed by the Company or its subsidiaries, or within three months after termination of his/her employment with the Company for any reason other than gross and willful misconduct, or if Optionee shall become disabled within the meaning of Section 22(e)(3) of the Code while employed by the Company or its subsidiaries, and Optionee shall not have fully exercised the Option, the Option may be exercised at any time within twelve months after Optionee’s death or disability by the legal representative or, if applicable, guardian of Optionee or by any person to whom the Option is transferred by will or the applicable laws of descent and distribution to the extent of the full number of Shares Optionee was entitled to purchase under the Option on the date of death (or termination of his/her employment, if earlier) or disability and subject to the condition that the Option shall not be exercisable after the expiration of its term.

     (d) With respect to the Option and any other incentive stock option granted to Optionee, Optionee understands that to the extent that the aggregate fair market value (determined as of the date of the Option and each other such incentive stock option) of the shares of Common Stock issuable upon exercise of the Option and all other incentive stock options which become exercisable for the first time by Optionee during any calendar year exceeds $100,000, then, in accordance with Section 422(d) of the Code, the portion of the Option and any such other incentive stock options that exceed $100,000 shall be treated as options that do not qualify as incentive stock options.

     4. Change in Control.

     (a) Except for an assumption of the Option as described in subsection (d), in the event that a “Change in Control” (as hereinafter defined) occurs, the vesting schedule set forth in Section 2 shall accelerate and the Option shall become exercisable with respect to 50% of the unvested Shares upon the occurrence of such transaction; provided, however, that if, in connection with the consummation of the transaction resulting in the Change in Control, the Optionee is offered consideration, in exchange for the Option, equal to the excess of the value received for one share of Common Stock in such transaction over the exercise price of the Option multiplied by the number of Shares subject thereto, the Option shall terminate upon the consummation of the Change in Control.

     (b) A “Change in Control” of the Company shall be deemed to have occurred if:

(i)	Any “person” (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) who did not own shares of the capital stock of the Company on the date of grant of the Option shall, together with his, her or its “Affiliates” and “Associates” (as such terms are defined in Rule 12b-2 promulgated under the Exchange Act), become the “Beneficial Owner” (as such term is defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company’s then outstanding securities (any such person being hereinafter referred to as an “Acquiring Person”);
(ii)	The “Continuing Directors” (as hereinafter defined) shall cease to constitute a majority of the Company’s Board of Directors;
(iii)	There should occur (A) any consolidation or merger involving the Company and the Company shall not be the continuing or surviving corporation or the shares of the Company’s capital stock shall be converted into cash, securities or other

2

property; provided, however, that this subclause (A) shall not apply to a merger or consolidation in which (i) the Company is the surviving corporation and (ii) the shareholders of the Company immediately prior to the transaction have the same proportionate ownership of the capital stock of the surviving corporation immediately after the transaction; (B) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company; or (C) any liquidation or dissolution of the Company; or

(iv) The majority of the Continuing Directors determine, in their sole and absolute discretion, that there has been a Change in Control.

     (c) “Continuing Director” shall mean any person who is a member of the Board of Directors of the Company, while such person is a member of the Board of Directors, who is not an Acquiring Person, an Affiliate or Associate of an Acquiring Person or a representative of an Acquiring Person or of any such Affiliate or Associate and who (i) was a member of the Company’s Board of Directors on the date of grant of the Option or (ii) subsequently became a member of the Board of Directors, upon the nomination or recommendation, or with the approval of, a majority of the Continuing Directors.

     5. Manner of Exercise.

     (a) The Option may only be exercised by Optionee or other proper party within the option period by delivering written notice of exercise to the Company at its principal executive office. The notice shall state the number of Shares as to which the Option is being exercised and shall be accompanied by payment in full of the option price for all of the Shares designated in the notice.

     (b) Optionee may, at the Company’s election, pay the option price in cash, by check (bank check, certified check or personal check) or by any other means set forth in the Plan.

     (c) The exercise of the Option is contingent upon receipt from Optionee (or other proper person exercising the Option) of a representation that, at the time of such exercise, it is Optionee’s intention to acquire the Shares being purchased for investment and not with a view to the distribution or sale thereof within the meaning of the Securities Act of 1933, as amended (the “Securities Act”); provided, however, that the receipt of such representation shall not be required upon exercise of the Option if, at the time of such exercise, the issuance of the Shares subject to the Option shall have been properly registered under the Securities Act and all applicable state securities laws. Such representation shall be in writing and in such form as the Company may reasonably request. The certificate representing the Shares so issued for investment shall be imprinted with an appropriate legend setting forth all applicable restrictions on their transferability.

     6. Adjustments. If Optionee exercises all or any portion of the Option subsequent to any change in the Common Stock through merger, consolidation, reorganization, recapitalization, stock dividend, stock split or other change in the corporate or capital structure of the Company, Optionee shall then receive for the aggregate price paid by him or her on such exercise, the number and type of securities or other consideration which he or she would have received if the Option had been exercised prior to the event changing the outstanding Common Stock in order to prevent dilution or enlargement of the rights granted hereunder.

     7. Miscellaneous.

     (a) The Option is issued pursuant to the Plan and is subject to its terms. Optionee hereby acknowledges receipt of a copy of the Plan. The Plan is also available for inspection during business hours at the principal office of the Company.

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     (b) This Agreement shall not confer on Optionee any right with respect to continuance of employment by the Company or any of its subsidiaries, nor will it interfere in any way with the right of the Company to terminate such employment at any time. Optionee shall have none of the rights of a shareholder with respect to the Shares until such Shares shall have been issued to him or her upon exercise of the Option.

     (c) The Company shall at all times during the term of the Option reserve and keep available such number of Shares as will be sufficient to satisfy the requirements thereof. The exercise of all or any part of the Option shall only be effective at, and may be deferred until, such time as the sale of the Shares pursuant to such exercise will not violate any federal or state securities laws, it being understood that the Company shall have no obligation to register the issuance or sale of the Shares for such purpose.

     (d) If Optionee shall dispose of any of the Shares acquired upon exercise of the Option within two years from the date hereof or within one year after exercise of the Option, then, in order to provide the Company with the opportunity to claim the benefit of any income tax deduction that may be available to it under the circumstances, Optionee shall promptly notify the Company of the dates of acquisition and disposition of such Shares, the number of Shares so disposed of, and the consideration, if any, received for such Shares. In order to comply with all applicable federal and state income tax laws and regulations, the Company may take such action as it deems appropriate to ensure that, if necessary, all applicable federal or state payroll, withholding, income or other taxes are withheld or collected from Optionee.

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the day and year first above written.

Restore Medical, Inc.
By:		Date:
	J. Robert Paulson, Jr.
	President and CEO
		Date:
	Optionee

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EX-10.9 16 c01111s1exv10w9.htm STANDARD FORM OF NON-QUALIFIED STOCK OPTION AGREEMENT

Exhibit 10.9

Restore Medical, Inc.
Non-Qualified Stock Option Agreement
Grant ID 0000000000XXX

     THIS AGREEMENT, made as of this                                          by and between Restore Medical, Inc., a Delaware corporation (the “Company”), and                      (“Optionee”).

     WHEREAS, the Company, pursuant to the 1999 Omnibus Stock Plan (the “Plan”), wishes to grant this stock option to Optionee;

     NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained, the parties hereto hereby agree as follows:

     1. Grant of Option. The Company hereby grants to Optionee the right and option (the “Option”) to purchase all or any part of an aggregate of  XXXX shares (the “Shares”) of the common stock, par value $.01 per share (the “Common Stock”), of the Company at the price of  $XX.XX  per Share on the terms and conditions set forth herein. It is understood and agreed that such price is not less than 100% of the fair market value of each such Share on the date of this Agreement. The Option is not intended to be entitled to treatment as an incentive stock option within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended (the “Code”).

     2. Duration and Exercisability. The Option may not be exercised by Optionee except as set forth below, and the Option shall in all events terminate ten years from the date hereof. Subject to the other terms and conditions set forth herein, the Option shall vest and may be exercised by Optionee in cumulative installments as follows:

     Vesting Schedule:

XXXX on XX/XX/XXXX
XXXX on XX/XX/XXXX
XXXX on XX/XX/XXXX
XXXX on XX/XX/XXXX
XXXX on XX/XX/XXXX
XXXX on XX/XX/XXXX
XXXX on XX/XX/XXXX
XXXX on XX/XX/XXXX

During the lifetime of Optionee, the Option shall be exercisable only by Optionee. The Option shall not be assignable or transferable by Optionee, other than by will or the laws of descent and distribution. The vesting of the Option is subject to acceleration under the circumstances described in Section 4.

     3. Effect of Termination of Relationship with the Company.

     (a) In the event that Optionee’s relationship with the Company or its subsidiaries shall terminate, for any reason other than Optionee’s gross and willful misconduct or Optionee’s death or disability, Optionee shall have the right to exercise the Option at any time within five years after such termination to the extent of the full number of Shares Optionee was entitled to purchase under the Option on the date of termination, subject to the condition that the Option shall not be exercisable after the expiration of its term.

     (b) In the event that Optionee’s relationship with the Company or its subsidiaries shall terminate by reason of Optionee’s gross and willful misconduct during the course of his/her relationship with the Company (as reasonably determined by the Company), the Option shall terminate as of the date of the misconduct and shall not be exercisable thereafter.

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     (c) If Optionee shall die during its relationship with the Company or its subsidiaries, or within three months after termination of such relationship with the Company for any reason other than gross and willful misconduct, or if Optionee shall become disabled within the meaning of Section 22(e)(3) of the Code during its relationship with the Company or its subsidiaries, and Optionee shall not have fully exercised the Option, the Option may be exercised at any time within twelve months after Optionee’s death or disability by the legal representative or, if applicable, guardian of Optionee or by any person to whom the Option is transferred by will or the applicable laws of descent and distribution to the extent of the full number of Shares Optionee was entitled to purchase under the Option on the date of death (or termination of its relationship with the Company, if earlier) or disability and subject to the condition that the Option shall not be exercisable after the expiration of its term.

     4. Change in Control

     (a) Except for an assumption of the Option as described in subsection (d), in the event that a “Change in Control” (as hereinafter defined) occurs, the vesting schedule set forth in Section 2 shall accelerate and the Option shall become exercisable with respect to 100% of the unvested Shares upon the occurrence of such transaction; provided, however, that if, in connection with the consummation of the transaction resulting in the Change in Control, the Optionee is offered consideration, in exchange for the Option, equal to the excess of the value received for one share of Common Stock in such transaction over the exercise price of the Option multiplied by the number of Shares subject thereto, the Option shall terminate upon the consummation of the Change in Control.

     (b) A “Change in Control” of the Company shall be deemed to have occurred if:

     (i) Any “person” (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) who did not own shares of the capital stock of the Company on the date of grant of the Option shall, together with his, her or its “Affiliates” and “Associates” (as such terms are defined in Rule 12b-2 promulgated under the Exchange Act), become the “Beneficial Owner” (as such term is defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company’s then outstanding securities (any such person being hereinafter referred to as an “Acquiring Person”);

     (ii) The “Continuing Directors” (as hereinafter defined) shall cease to constitute a majority of the Company’s Board of Directors;

     (iii) There should occur (A) any consolidation or merger involving the Company and the Company shall not be the continuing or surviving corporation or the shares of the Company’s capital stock shall be converted into cash, securities or other property; provided, however, that this subclause (A) shall not apply to a merger or consolidation in which (i) the Company is the surviving corporation and (ii) the shareholders of the Company immediately prior to the transaction have the same proportionate ownership of the capital stock of the surviving corporation immediately after the transaction; (B) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company; or (C) any liquidation or dissolution of the Company; or

     (iv) The majority of the Continuing Directors determine, in their sole and absolute discretion, that there has been a Change in Control.

     (c) “Continuing Director” shall mean any person who is a member of the Board of Directors of the Company, while such person is a member of the Board of Directors, who is not an Acquiring Person, an Affiliate or Associate of an Acquiring Person or a representative of an Acquiring Person or of any such Affiliate or Associate and who (i) was a member of the Company’s Board of Directors on the date of grant of the Option or (ii) subsequently became a member of the Board of Directors, upon the nomination or recommendation, or with the approval of, a majority of the Continuing Directors.

     (d) In the case of a Change of Control as described in Subsections (b)(iii)(A) or (B), the Options may be assumed by the surviving or acquiring corporation, as the case may be.

     5. Manner of Exercise.

     (a) The Option may only be exercised by Optionee or other proper party within the option period by delivering written notice of exercise to the Company at its principal executive office. The notice shall state the

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number of Shares as to which the Option is being exercised and shall be accompanied by payment in full of the option price for all of the Shares designated in the notice.

     (b) Optionee may, at the Company’s election, pay the option price in cash, by check (bank check, certified check or personal check) or by any other means set forth in the Plan.

     (c) The exercise of the Option is contingent upon receipt from Optionee (or other proper person exercising the Option) of a representation that, at the time of such exercise, it is Optionee’s intention to acquire the Shares being purchased for investment and not with a view to the distribution or sale thereof within the meaning of the Securities Act of 1933, as amended (the “Securities Act”); provided, however, that the receipt of such representation shall not be required upon exercise of the Option if, at the time of such exercise, the issuance of the Shares subject to the Option shall have been properly registered under the Securities Act and all applicable state securities laws. Such representation shall be in writing and in such form as the Company may reasonably request. The certificate representing the Shares so issued for investment shall be imprinted with an appropriate legend setting forth all applicable restrictions on their transferability.

     6. Adjustments. If Optionee exercises all or any portion of the Option subsequent to any change in the Common Stock through merger, consolidation, reorganization, recapitalization, stock dividend, stock split or other change in the corporate or capital structure of the Company, Optionee shall then receive for the aggregate price paid by him or her on such exercise, the number and type of securities or other consideration which he or she would have received if the Option had been exercised prior to the event changing the outstanding Common Stock in order to prevent dilution or enlargement of the rights granted hereunder.

     7. Miscellaneous.

     (a) The Option is issued pursuant to the Plan and is subject to its terms. Optionee hereby acknowledges receipt of a copy of the Plan. The Plan is also available for inspection during business hours at the principal office of the Company.

     (b) This Agreement shall not confer on Optionee any right with respect to continuance of employment by or continuance of the relationship with the Company or any of its subsidiaries, nor will it interfere in any way with the right of the Company to terminate such employment at any time. Optionee shall have none of the rights of a shareholder with respect to the Shares until such Shares shall have been issued to him or her upon exercise of the Option.

     (c) The Company shall at all times during the term of the Option reserve and keep available such number of Shares as will be sufficient to satisfy the requirements thereof. The exercise of all or any part of the Option shall only be effective at, and may be deferred until, such time as the sale of the Shares pursuant to such exercise will not violate any federal or state securities laws, it being understood that the Company shall have no obligation to register the issuance or sale of the Shares for such purpose.

     (d) If Optionee shall dispose of any of the Shares acquired upon exercise of the Option within two years from the date hereof or within one year after exercise of the Option, then, in order to provide the Company with the opportunity to claim the benefit of any income tax deduction that may be available to it under the circumstances, Optionee shall promptly notify the Company of the dates of acquisition and disposition of such Shares, the number of Shares so disposed of, and the consideration, if any, received for such Shares. In order to comply with all applicable federal and state income tax laws and regulations, the Company may take such action as it deems appropriate to ensure that, if necessary, all applicable federal or state payroll, withholding, income or other taxes are withheld or collected from Optionee.

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     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the day and year first above written.

RESTORE MEDICAL, INC.
By:		Date:
	J. Robert Paulson, Jr.
	President and CEO
		Date:
	Optionee

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EX-10.10 17 c01111s1exv10w10.htm MANAGEMENT INCENTIVE PLAN

Exhibit 10.10

RESTORE MEDICAL, INC.

MANAGEMENT INCENTIVE PLAN

1. PURPOSES.

     (a) The purpose of the Plan is to provide a means by which selected Key Employees of the Company may be given an opportunity to participate in the proceeds of a Change of Control transaction.

     (b) The Company, by means of the Plan, seeks to retain the services of persons who are now Key Employees of the Company, to secure and retain the services of new Key Employees, and to provide incentives for such persons to exert maximum efforts for the success of the Company.

2. DEFINITIONS.

     (a) “Management Bonus” means an amount of cash and/or securities, determined pursuant to the Plan, equal to twenty-five percent (25%) of the total amount of gross proceeds upon a Change of Control, if any, in excess of $72,000,000, up to a maximum aggregate bonus of $3,300,000.

     (b) “Board” means the Board of Directors of the Company.

     (c) “Change of Control” means any consolidation or merger of the Company with or into another corporation or entity (after which the pre-existing shareholders of the Company do not own a majority of the outstanding shares of the surviving entity), an acquisition or sale of substantially all of the assets of the Company or a sale of stock in a single transaction (or several related transactions) to one person (or a group acting together) who, as a result of such transaction, shall own more than 50% voting control of the Company, or any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company.

     (d) “Closing” means the closing of a transaction constituting a Change of Control.

     (e) “Company” means Restore Medical, Inc., a Minnesota corporation.

     (f) “Key Employee” means any current or former employee or consultant of the Company who is designated by the Chief Executive Officer and approved by the Board from time to time as a Key Employee. The individuals currently designated as Key Employees are set forth on Exhibit A of the Plan.

     (g) “Plan” means this Restore Medical, Inc. Management Incentive Plan.

     (h) “Restated Articles” means the Amended and Restated Articles of Incorporation of Restore Medical, Inc.

3. ADMINISTRATION.

     (a) The Plan shall be interpreted and administered by the Board, whose actions shall be final, binding and conclusive on all persons, including the Key Employees. The Board may, in its sole discretion, increase, decrease or eliminate a previously authorized percentage allocation to a Key Employee upon a determination by the Board that such percentage is no longer reflective of the Key Employee’s contributions to the Company. Any such increase of a percentage for a Key Employee shall decrease the other percentages of Key Employees and any such decrease or elimination of a percentage for a Key Employee by the Board shall increase the other percentages of Key Employees, in each case, on a pro rata basis unless otherwise designated by the Chief Executive Officer and approved by the Board.

     (b) The Board, in its sole discretion, shall have the power, subject to, and within the limitations of, the express provisions of the Plan:

     (i) To approve from time to time which employees of the Company are designated by the Chief Executive Officer as Key Employees entitled to participate in the Plan. This authority shall also include the ability to approve the proposal by the Chief Executive Officer and the Executive Chairman that one or more employees previously designated as Key Employees shall no longer be entitled to participate in the Plan.

     (ii) To approve the percentage allocation of the cash or securities in the Management Bonus to each of the Key Employees proposed by the Chief Executive Officer.

     (c) The Board may delegate some or all of its powers and responsibilities under the Plan to a committee of the Board.

4. ALLOCATION OF MANAGEMENT BONUS.

     (a) The allocation of the Management Bonus to individuals designated as Key Employees as of the date hereof shall be as set forth on Exhibit A, and subject to the terms of this Plan.

     (b) In the event that the Company’s outside accounting firm determines that a distribution to a Key Employee under Section 5 would result in the imposition of a “parachute payment” excise tax under Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), the Chief Executive Officer may reallocate the Management Bonus among Key Employees in a manner that reduces or eliminates the amount of such excise tax.

     (c) Any percentage amounts that are unallocated at the time of a Change of Control shall be allocated immediately prior to such Change in Control in accordance with the recommendation of the Company’s Chief Executive Officer and approval of the Board. If no such recommendation is provided and Board approval received, such unallocated percentage amounts shall be distributed on a pro-rata basis among the existing Key Employees at such time.

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5. DISTRIBUTIONS.

     (a) If the conditions for distributions set forth in the Plan are satisfied, each Key Employee shall be entitled to receive upon the Closing and simultaneously with payments to the Company’s shareholders, a distribution equal to (i) such Key Employee’s allocation of the Management Bonus times (ii) the aggregate dollar value of the Management Bonus, subject to the limitations set forth in Section 4 above. Such distributions shall be made in cash and/or securities, as determined by the Board, in its sole discretion. While generally each participant will receive his or her distributive share of the Management Bonus in the same form or forms of payment and in the same proportions paid by the purchaser(s) upon the Change of Control, the Board shall have the discretion to restructure the form and timing of payment of such distributions to accommodate the business objectives of the Company in the Change of Control, which may include, but not be limited to, (x) consideration of the tax consequences to the Company, its shareholders, and the Plan’s participants, (y) financial accounting consequences for the Company or the acquiror, and (z) satisfaction of any applicable securities law requirements.

     (b) Any securities that are issued to the Key Employees pursuant to this Plan shall be subject to the same or similar restrictions as imposed by a purchaser on the securities of the Company’s shareholders as set forth in the agreement pursuant to which the Control of Control occurs.

     (c) Subject to any adjustments made under Section 5(a) above, if any, payments to Key Employees under the Plan shall be made within 30 days of the Closing (provided that proceeds from the Change of Control event shall have been made available to the Company within such period, or otherwise immediately upon receipt of such proceeds from the Change of Control), except for payments to be made with respect to contingent payments payable in connection with a Change of Control, which shall be made as soon as administratively reasonable following the receipt by the Company or its shareholders of such payments.

     (d) Key Employees must be employed as of the closing date of the Change of Control transaction in order to be eligible to receive any payments pursuant to the Plan.

6. AMENDMENT OR TERMINATION OF THE PLAN.

     (a) The Board at any time, and from time to time prior to the Closing, may amend or terminate the Plan, so long as such actions are approved after consultation with the Chief Executive Officer and, subject to Section 3(a), do not adversely affect any beneficiary of this Plan.

     (b) The Plan shall automatically terminate upon the earliest to occur of (i) December 31, 2003, unless a Change of Control has occurred prior to such date, (ii) the Closing and completion of all payments under the terms of the Plan, and (iii) the automatic conversion of all of the Company’s outstanding preferred stock into common stock pursuant to Section 3.7 of the Restated Articles (or any successor provision thereto).

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7. NO GUARANTEE OF FUTURE SERVICE.

     Selection of an individual to participate in the Plan shall not provide any guarantee or promise of continued service of the participant with the Company, and the Company retains the right to terminate the employment of any employee at any time, with or without cause, for any reason or no reason, except as may be restricted by law or contract.

8. TAX WITHHOLDING.

     The Company shall withhold from any distributions under the Plan any amount required to satisfy the Company’s income and employment tax withholding obligations under any applicable Federal and State laws.

9. COMPANY OBLIGATIONS.

     The Plan shall constitute a liability of the Company that shall be satisfied prior to any distributions to shareholders of the Company. Further, the Company shall use its best efforts to provide that a portion of the net proceeds from any transaction that results in a Change in Control be distributed in substantial accordance with the terms of this Plan, subject to the fiduciary duties applicable to the Company and the Board; provided, however, that failure by the Chief Executive Officer to propose a reasonable initial recommendation of allocations for the Management Bonus or failure by the Board to reasonably approve such initial recommendation shall not operate to delay, block or otherwise impede the Company’s undertaking a Change of Control or making payments to the Company’s shareholders resulting therefrom

10. CHOICE OF LAW.

     All questions concerning the construction, validation and interpretation of the Plan will be governed by the law of the State of Minnesota.

11. SUCCESSORS; THIRD PARTY BENEFICIARIES.

     This Plan shall be binding upon any successor to the Company. The Company acknowledges that the Key Employees will rely on the provisions of this Plan and therefore agrees that the Key Employees shall be deemed to be third parties beneficiaries hereof.

12. SEVERABILITY.

     If any provision of this Plan is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions shall nevertheless continue in full force and effect without being impaired or invalidated in any way and shall be construed in accordance with the purposes, tenor and effect of this Plan.

13. HEADINGS.

     The headings in the Plan are inserted for convenience only and shall not be deemed to constitute a part hereof nor to affect the meaning thereof.

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     The Plan has been adopted by the Board of Directors of the Company effective as of the 12^th day of June, 2003

RESTORE MEDICAL, INC.
By:	/s/ Susan L. Critzer
	Name:	Susan L. Critzer
	Title:	President and Chief Executive Officer

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EXHIBIT A

Name of Key Employee	Percent of Management Bonus
Mark B. Knudson		10.0	%
Susan L. Critzer		14.0	%
Bob Campbell		10.0	%
Ed Numainville		7.5	%
Tim Conrad		3.0	%
Robert S. Nickoloff		3.0	%
Brian Erickson		3.0	%
Phil Radichel		3.0	%
John Sopp		3.0	%
Jim Kruse		3.0	%
Dale Noel		3.0	%
Lisa Asper		3.0	%
Dean Horstman		3.0	%
Dave Coleman		3.0	%
Glen Peterson		3.0	%
Brett Biener		3.0	%
New Sales Representative		3.0	%
All Other Employees		15.0	%
TOTAL:		100.0	%

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EX-10.12 18 c01111s1exv10w12.htm EU AUTHORIZED REPRESENTATIVE CONTRACT FOR SERVICES

Exhibit 10.12

QUALITY FIRST INTERNATIONAL

EU Authorised Representative Contract for Services

This contract is between Restore Medical, Inc., 2800 Patton Road, Roseville, Minnesota 55113, USA (referred to in this contract as the Company) and Quality First International (referred to in this contract as QFI) of: Suites 317/318, Burford Business Centre, 11 Burford Road, Stratford, London, E15 2ST, United Kingdom.

Contact for the Company: Mr. E. Numainville

Contact for QFI: H. Atchia

Date of commencement: 16 June 2003

Leading People — Leading Change

      Quality First International is a trading name of Quality First International Limited, a company registered in England No 03103506. Registered Office 20 Eversley Road, Bexhill on Sea, East Sussex, TN40 1HE, United Kingdom

1.0 Provision of QFI personnel

1.1 QFI agree to act as the Company’s EU Authorised Representative.

1.2 The technical competence and necessary experience required by such a role will be provided by Mr H Atchia, Technical Director currently registered with the appropriate Competent Authorities as EU Authorised Representative, for the products covered by this contract and referred to in QFI form Schedule A.

1.3 The administration of the services provided under this contract and responsibility for liaising between the Company and QFI, and QFI and the Competent Authority will be provided by the EU Authorised Representative Client Co-ordinator (EURCC), appointed by QFI from QFI’s full-time staff.

2.0 Services provided by QFI

2.1 Interpretation of requirements.

2.2 Completion, review, approval and submission of all necessary documentation required by the Competent Authority.

2.3 Registration of these matters on the Company’s behalf.

2.4 Safe keeping of all copies of the Company’s current listings of products registered by QFI with the Competent Authority on the Company’s behalf covered by the Declaration of Conformity.

2.5 Safe keeping of records relating to discussions with the Competent Authorities on the Company’s behalf.

2.6 Receipt of information concerning incidents referred to in Article 10 of the Council Directive 93/42/EEC (commonly known as the Medical Devices Directive) and/or Article 11 of Council Directive 98/79/EC (commonly known as the In vitro Diagnostic Medical Devices Directive) and 65/65/EEC (relating to medicinal products as applied to Blood Bags) communication of such information to the Company.

3.0 Responsibility of the Company

3.1 The Company should ensure that the Medical Devices Vigilance system guidelines are made known to persons responsible for placing devices on the market and any other agents authorised to act on the Company’s behalf so that the Company’s responsibilities may be fulfilled.

3.2 The Company must report all incidents fulfilling the notification criteria as well as notifications such as Product Recall and Safety Alert notices to QFI.

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3.3 The Company shall institute documented procedures for alerting QFI of changes in relevant company and product information in order for QFI to complete any registration or re-registration of products/personnel with the Competent Authority.

3.3.1 Such information shall include the Company contact person for the purposes of communication with QFI, product range (including new products and products to be discontinued, change of intended use or other factors that alter the classification of the product under the rules specified in Annex IX Council Directive 93/42/EEC as relevant and any relevant compliance issues which could affect such registration).

3.3.2 The QFI Schedule A form (or agreed equivalent) shall be used for such purposes.

4.0 Timescale for the initial reporting of an incident or near incident

4.1 Incidents ten (10) days.

4.2 Near incidents thirty (30) days.

4.3 The times given above are the maximum times for determining the relevant facts and making an initial report to the appropriate Competent Authority.

4.4 Due to the strict reporting timetable requirements the Company must have a sound and effective reporting mechanism in place between the Company’s end users, the Company’s distributors and the Company’s own organisation which will allow speedy and complete reporting to the Company’s EU Authorised Representative. Once the Company is aware of an incident or near incident, it must ensure notification to QFI within twenty four (24) hours.

5.0 Systematic recalls

5.1 Any technical or medical reason for the systematic recall of a device is required by the Directives to be notified by the manufacturer to the appropriate Competent Authority.

5.2 Copies of advisory notices implementing recalls should be sent by the manufacturer to the appropriate Competent Authority before or at the same time as the notices are sent to the relevant users.

6.0 Commercial removal from the market

6.1 Removals from the market for a purely commercial reason are not required to be reported to the relevant Competent Authority but should be reported to QFI.

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7.0 Labelling & packaging requirements

7.1 The Company is obliged to list QFI’s details as agreed on all labels, packaging or user instruction manuals/leaflets.

EU Authorised Representative
QUALITY FIRST INTERNATIONAL
20 Eversley Road
Bexhill on Sea
East Sussex
TN401HE
United Kingdom

Telephone: +44-208-221-2361
Telefax:      +44-208-221-1912

7.2 Copy artwork of the EU Authorised Representative details must be sent to QFI for approval before going to print.

7.3 QFI guarantees that the address, telephone and fax details will not change without a sufficient period of notice to be agreed, save for any changes in area code as may be made by the telephone companies.

7.4 Any variation in the appearance and details on labels, packaging and user instruction manuals or leaflets must be agreed between the Company and QFI.

8.0 Confidential information

8.1 QFI will not disclose confidential information relating to the services under this contract to any third party. This does not affect the obligation of QFI to provide information under civil or criminal law.

9.0 Work records

9.1 QFI will keep records of all work done under the contractual terms in accordance with QFI’s standard approved procedures.

10.0 Fees

10.1 Where this contract is first entered into between QFI and the Company a First registration fee of US $195 (one hundred and ninety-five Dollars US) payable on return of the signed contract by the Company.

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10.2 Annual fee for undertaking the role of EU Authorised Representative, is US $3245 (three thousand two hundred and forty-five Dollars US) for the contract period of TWELVE (12) months from the date of signature by the Company, payable on return of the signed contract, covering up to TEN (10) reported incidents or other notifications to the Competent Authority within that TWELVE (12) month period.

10.2.1 QFI will maintain the annual fee for undertaking the role of EU Authorised Representative for a period of three (3) years commencing the execution of this contract

10.2.2 Registration of additional products and changes to an existing, registered product attracts a unit charge of US $125 (one hundred and twenty-five Dollars US) for each product.

10.3 Any additional reported incidents or other notifications will be charged at an individual rate of US $125 (one hundred and twenty-five Dollars US) each as an additional unit fee.

10.3.1 QFI will maintain the additional unit fee for a period of three (3) years commencing the execution of this contract.

10.4 The Company agrees to make all payments by bank transfer.

10.4.1 Payment by bank transfer shall be made nett of charges to Quality First International Limited’s account at HSBC Plc, Hastings Branch, Hastings, East Sussex, TN34 1HW, United Kingdom, Bank swift code 40-05-15, account 39157053 605837285-561, IRAN GB10 MIDL 4005 1539 1570 53, BIC MIDLGB22.

10.4.2 The Company shall ensure all bank charges for transfers are paid and that nett amounts are received in QFI’s account

10.5 Banking wire transfer charges per transfer of US $45 (forty-five Dollars US).

10.6 All amounts due must be received gross by QFI.

11.0 Extra charges

11.1 The Company will be responsible for all additional charges incurred by QFI as a result of the provision of services where the Competent Authority requires work of QFI which is not part of the normal reporting procedure.

11.2 QFI will keep the Company informed when this occurs and where possible inform the Company in advance of the likely cost of this additional requirement from the Competent Authority.

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12.0 Payment terms

12.1 Invoices requesting First Registration Fee and the Annual Fee must be paid in full before QFI will undertake the provision of the above services.

12.2 Where the Company forwards details of any additional reported incidents or other notifications to QFI over and above the agreed TEN (10) (as referred to in Section 10.2 above) the Company shall at the same time forward to QFI the additional unit fee (as referred to in Section 10.3)

13.0 Advice & information

13.1 The EU Authorised Representative Contract in principle is for QFI to act as a receiving and forwarding communications representative between the Company and the Competent Authority.

13.2 The reporting time requirements are the responsibility of the Company through the creation of suitable systems and procedures to ensure notification of adverse incidents meeting the notification criteria of the Medical Device Vigilance system (MDVs) guidelines.

13.2.1 Where necessary, the Company’s procedures for MDVs notification shall be harmonised to ensure QFI’s turnaround time for completion of such notification can be fulfilled.

13.2.2 The Company will ensure that any adverse incident notification submissions are communicated to QFI in finished from no less than one working day before the expiry of the relevant reporting time requirement for notification to the Competent Authority by QFI.

13.2.3 QFI will implement documented procedures to ensure notification time requirements of the MDVs guidelines are achievable.

13.3 The accuracy of the details of any reported incident and/or notification are the responsibility of the Company.

13.3.1 QFI will implement documented procedures to ensure review of adverse incident reports and will confirm completion of notifications made to the Competent Authority within one (1) working day to the Company.

13.3.2 QFI will implement documented procedures to ensure review and communication of relevant adverse incident communications from the Competent Authority within one (1) working day to the Company.

13.4 The provision of advice and/or information by QFI is in confidence.

13.5 Liability other than death or personal injury as the result of the provision of advice and/or information by QFI, is hereby excluded.

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14.0 Renewal

14.1 Upon the anniversary of the date of commencement, continuation of the EU Authorised Representative Contract may be entered into subject to:

(a) satisfactory annual technical documentation review of the Company’s file.

(b) the receipt by QFI of the fees for the forthcoming years service.

15.0 Termination

15.1 This contract will terminate upon a breach of condition by either party where the injured party elects not to continue with the contract

15.2 By the Company serving written notice on QFI stating that

(1) QFI details have been removed from all Company labels and

(2) that QFI is no longer the EU Authorised Representative of the. Company.

15.3 By QFI serving written notice on the Company stating that

(1) QFI no longer acts as the Company EU Authorised Representative and

(2) stating that QFI requires the Company to remove all QFI details from all Company labels.

15.4 The period of written notice as referred to in 15.2 and 15.3 shall be a reasonable period taking into account the length of time the contract period has to run. Where there is a dispute as to length of written notice, term 16.1 shall apply.

16.0 Arbitration

16.1 In the event of any dispute whether as to law or fact or mixed law and fact between the Company and QFI, the parties agree to resolve the dispute amicably failing which the dispute will be referred to an arbitrator appointed by the Chartered Institute of Arbitrators. The arbitrator’s decision shall be final.

17.0 Start date

17.1 QFI will consider itself bound by the terms of this contract for the contract period from 1 January 2005 upon signature by the Company.

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18.0 Acceptance

As agent for QFI	/s/ H. Atchia
Title:	Technical Director
Name:	H A R D Atchia
Date:	January 25, 2005
Accepted on the terms herein stated:

As agent for the Company: /s/ Edward W. Numainville

Title: Vice President Regulatory/Clinical Affairs

Name: Edward W. Numainville

Date: February 9, 2005

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EU Authorized Representative Contract for Services

Annual renewal of EU authorized representative contact

In accordance with the Renewal term 14.1 (a) and (b), please sign below and confirm:

(1) that you will provide QFI with the following:

(i) updates for various products you sell bearing the CE marking of conformity to update the Product Registration File we have notified to the Competent Authority.

(ii) Copies of the latest versions of the following information for all products placed on the market since initial CE marking by your company plus any new product (as agreed):

     a) Description of each product,

     b) Intended use of each product, including an example of unit and outer labels and Instructions for Use or equivalent),

     c) Declaration of Conformity,

     d) CE and Quality System Certificates,

     e) Date of commencement of manufacture of each product,

     f) A list of all technical documentation and related certificates,

     g) Breakdown of complaints, corrective and preventive action performed for these complaints plus complaints analysis,

     h) Hazard evaluation (risk analysis), including the Risk Management File according to EN 1441/EN ISO 14971,

     i) “technical” file or summary of content,

     j) List of design changes since First Placement of the Product on the Market with the CE marking of conformity,

     k) Copies of the relevant registration letters, authorisations and Certificates issued by regulatory authorities and other inspection bodies for the device.

     l) 27 original letters of appointment of QFI as EUAR for the Company.

for US manufacturers, please would also send the following documents with FDA:

     a) Establishment Registration,

     b) Device listing.

(iii) Summary of clinical data for each product according to Article 15/Annex X Council Directive 93/42/EEC

so that the annual technical documentation review of your company’s file may be conducted.

(2) that the amount of $3245.00 will be forwarded to QFI by return, together with the transfer charge of $45 in accordance with term 10.4.

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As agent for QFI	/s/ H. Atchia
Title:	Technical Director
Name:	H A R D Atchia
Date:	January 25, 2005
Accepted on the terms herein stated:

As agent for the Company: /s/ Edward W. Numainville

Title: Vice President Regulatory/Clinical Affairs

Name: Edward W. Numainville

Date: February 9, 2005

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EX-10.13 19 c01111s1exv10w13.htm DISTRIBUTION AGREEMENT

Exhibit 10.13

DISTRIBUTION AGREEMENT

     THIS AGREEMENT is made as of 20 January 2005 (the “Effective Date”) by and between Restore Medical, Inc., a Minnesota corporation having its principal place of business at 2800 Patton Road, Roseville, Minnesota 55113 USA (“Restore”) and Sonomed Ltd., a company organized under the laws of Israel and having its principal place of business at 40/42 Hatizmoret Str., Rishon Le Zion, Zip 75562, Israel (“Distributor”).

RECITALS

A.	Restore has developed a proprietary implantable medical device as more fully described in Exhibit A (the “Products”).
B.	Restore wishes to appoint Distributor, and Distributor wishes to be appointed, as a distributor of the Products in the territory set forth in Exhibit A (the “Territory”).

1. APPOINTMENT

     1.1 Scope. Subject to the terms and conditions of this Agreement, Restore hereby appoints Distributor, and Distributor hereby accepts appointment, as Restore’s exclusive distributor of the Products listed in Exhibit A in the Territory. So long as Distributor is Restore’s exclusive distributor of the Products in the Territory under the terms of this Agreement, and subject to the laws and regulations applicable in the Territory, Restore agrees that it will not sell or distribute the Products in the Territory, directly or through third parties.

     1.2 Subdistributors. Distributor may appoint subdistributors that are duly licensed in the Territory to promote and/or distribute Products within the Territory, provided that Distributor obtains Restore’s prior written approval to such appointment, which approval Restore may grant or withhold in its sole discretion. In no event shall any such subdistributor be allowed to promote, market or distribute products which compete with the Products without Restore’s prior written consent. Distributor shall at all times remain fully liable for and shall indemnify and hold Restore harmless for the performance of its subdistributors.

     1.3 Sales Outside the Territory. Distributor shall not sell the Products to customers outside the Territory.

     1.4 Competitive Products. During the term of this Agreement, Distributor shall not, either directly or indirectly, through subdistributors or otherwise, develop, manufacture, promote, market or distribute products that are competitive with the Products.

2. OBLIGATIONS OF DISTRIBUTOR.

     2.1 Marketing Efforts. Distributor shall have the following obligations with respect to the marketing and distribution of the Products:

(a)	To use its best efforts to further the promotion, marketing, sales, and distribution of the Products in the Territory, and to maintain adequate sales and service facilities in the Territory;
(b)	To promptly respond to all inquiries or complaints from purchasers of the Products, and to maintain and support the Products;
(c)	To provide adequate and appropriate training to its sales and support personnel, approved agents and subdistributors, and clinicians concerning the Products, and to make available such persons for training;
(d)	To provide for Restore’s approval a reasonably detailed business plan for the marketing and distribution of the Products within thirty (30) days of the Effective Date (including pricing strategies and promotional activities) and thereafter to update for Restore’s approval such business plan at least once per year;
(e)	To provide Restore with reports of Distributor’s activities, the market for the Products, customer prospects and other information regarding sales of the Products once per quarter in such detail as reasonably requested by Restore;
(f)	To provide Restore on a timely basis for each calendar quarter during the term of this Agreement a rolling quarterly forecast of orders for the Products for the next 12 months;
(g)	To prepare and print advertising and marketing materials for the Products, which materials must be approved in writing by Restore prior to their first use, as described in Section 3.1 below;
(h)	To conduct its business in a professional manner which will reflect positively upon Restore and its Products; and
(i)	To comply with all laws and regulations of the Territory.

     2.2 Minimum Purchase Requirement. Distributor agrees to purchase and take delivery of a quantity of Products that, at a minimum, meets the Minimum Purchase Requirements specified in Exhibit A. No less than three (3) months before the end of each twelve (12) month period (the first of which shall commence on the Effective Date) during the initial term hereof, and any renewal term, new Minimum Purchase Requirements shall be agreed by the parties. Distributor understands and agrees that achievement of the Minimum Purchase Requirements is of the essence of this Agreement and if at the end of the initial term or any renewal term: (a) Distributor and Restore fail to agree upon Minimum Purchase Requirements for the Products for the following year, or (b) Distributor fails to meet the Minimum Purchase Requirements, Restore, at its sole option, shall have the right to (1) terminate this Agreement pursuant to Section 9.2(c)(i) hereof with no liability to Distributor, or (2) appoint other distributors of the Products in all or part of the Territory (i.e., so that Distributor is Restore’s nonexclusive distributor of the Products in the Territory) during the remaining term of this Agreement notwithstanding any contrary terms herein.

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     2.3 Expired Products. Distributor shall not sell any Products beyond their stated expiration date.

     2.4 Returned Products Policy. All returns must be authorized in writing by Restore and an authorization number given to Distributor prior to the return of any Product, freight pre-paid. Product returned must be unopened and undamaged, and must be received within 30 days of the invoice date for full replacement or credit. Product returned after 30 days may be subject to a restocking fee. Returns after 90 days from the invoice date may not be accepted. For Product returns because of defective product or under warranty, see the warranty provision in Section 5.1.

     2.5 Reverse Engineering; Alteration of Products. Except as may be permitted by applicable law, Distributor shall not reverse engineer or disassemble the Products and shall not knowingly allow any other person to do so. Distributor shall not alter the Products or any Product packaging or labeling except with the prior written consent of Restore.

     2.6 Inventory. Distributor shall at all times maintain an inventory of the Products sufficient to meet anticipated demand but calculated to result in the minimum possible return of Products under Section 2.4.

     2.7 Governmental Requirements; Registrations. Except as otherwise agreed by Restore in writing, Distributor shall be responsible for compliance with all governmental requirements for importing the Products into the Territory, including but not limited to all customs requirements. Distributor shall obtain any necessary import licenses at its own expense. Restore shall be responsible for obtaining all governmental approvals for the Products, and Distributor shall provide Restore with assistance in obtaining all governmental approvals as Restore may reasonably request, unless the parties agree otherwise or unless otherwise required by law in the Territory. In the event that Distributor obtains the necessary registrations or approvals by agreement of the parties or because required by the law of the Territory, Distributor shall provide Restore with copies of filings and correspondence with regulatory authorities relating to the Products or such registrations or approvals and, upon termination or expiration of this Agreement, Distributor shall promptly execute and deliver all documents reasonably requested by Restore to Restore or any third party designated by Restore to transfer such registrations or approvals to Restore or its designee. If Distributor obtains such registrations or approvals in its own name without Restore’s prior written consent, Distributor agrees that such registrations and approvals shall be the property of Restore and Distributor shall cooperate as requested by Restore in connection therewith.

     2.8 Product Claims. Distributor shall make no representations, warranties or other claims concerning the Products except as authorized by Restore in writing or as are contained in any of Restore’s marketing materials that may be provided to Distributor. Without prior written consent of Restore, no studies concerning the Products conducted by or for Distributor shall be deemed clinical studies of the Products or shall be used to market or promote the Products. Restore shall be the sole owner of, and Distributor hereby assigns to Restore all right, title and interest in, the Products and any information or data concerning the Products that result from such studies or clinical trials. Distributor shall take any actions and execute any documents requested by Restore to perfect Restore’s ownership rights in such information or data.

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     2.9 Notice of Intellectual Property Infringement. Distributor shall promptly notify Restore in writing of any patent, copyright infringement or unauthorized use of Restore’s trade secrets in the Territory. Restore reserves the right in its sole discretion to institute any proceedings against such third party infringers, and Distributor shall refrain from doing so. Distributor shall cooperate fully with Restore in any legal action taken by Restore against such third parties, provided that Restore shall pay all expenses of such action and all damages which may be awarded or agreed upon in settlement of such action shall accrue to Restore.

     2.10 Laws of the Territory. Distributor shall promptly inform Restore of any legal requirements in the Territory relating to the use or distribution of the Products, marketing materials or Product packaging and labeling.

     2.11 Insurance. Distributor shall maintain in force, during the term of this Agreement and for as long thereafter as a practical need exists, one or more policies of liability insurance with an insurer reasonably acceptable to Restore which shall cover all liabilities of Distributor, whenever arising, attributable to the Products and in an amount of at least One Million Dollars ($1,000,000). Restore shall be designated as an additional named insured under each such policy and shall be provided with a certificate of insurance within thirty (30) days after the issuance and each renewal thereof.

     2.12 Adverse Reactions. Distributor shall advise Restore within twenty four (24) hours of any adverse reaction, injury or death resulting from any use of the Products (“Adverse Reaction”) of which it becomes aware. Distributor shall also, within five (5) days thereafter, provide Restore with a written report stating the full facts known to it about the Adverse Reaction, including but not limited to customer name, address, telephone number and Product, lot or serial number. Restore shall from time to time provide Distributor with written procedures regarding the information required by Restore in the event of any Adverse Reaction. At all times during the term of this Agreement, Distributor shall have appropriate written procedures established for processing any Adverse Reaction, and shall provide the same to Restore upon request. As part of such procedures, Distributor shall establish a means for properly (a) tracking delivery of Products to customers (including all customers who receive Products from subdistributors), including, without limitation, tracking which customers have received Products from particular lot numbers, and (b) maintaining its distribution records for the Products for a reasonable time period. All information related to any Adverse Reaction shall be the Confidential Information of Restore, and shall not be disclosed by Distributor to any third party or used by Distributor except as required by applicable laws.

     2.13 Distributor Expenses. Distributor assumes full responsibility for all its own costs and expenses incurred in carrying out its obligations under this Agreement, including but not limited to all rents, salaries, commissions, and advertising, demonstration, travel and accommodation expenses.

     2.14 Product Recalls.

(a) Notification. If either party believes that a recall of any Products in the Territory is desirable or required by law in the Territory or elsewhere, it shall immediately notify the other party. The parties shall then discuss reasonably and in good faith

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	whether such recall is appropriate or required and the manner in which any mutually agreed recall shall be handled. This Section 2.14 shall not limit the obligations of either party under law with respect to recall of Products required by law or properly mandated by any governmental authority.
(b)	Corrective Action. If any governmental agency having jurisdiction in the U.S. or the Territory shall request or order any corrective action with respect to Products supplied hereunder, including any Product recall, customer notice, restriction, change, corrective action or market action or any Product change, the parties shall cooperate fully to effectuate such corrective action.
(c)	Correspondence. Each party shall promptly provide the other with copies of correspondence to or from governmental authorities relating to corrective action in the Territory concerning the Products.
(d)	Records, Adverse Event Reports and Recalls. Distributor shall maintain complete and accurate records of all Products imported into and resold by Distributor in the Territory, which records may be examined at any time by Restore upon reasonable notice to Distributor.

     2.15 Personnel.

(a)

Distributor shall employ or retain an adequate organization of well-trained and qualified personnel to effectively perform its obligations under this Agreement in the Territory.

(b)

Distributor shall comply fully with its obligations under labor, tax, social welfare and other laws relating to its personnel. In addition, Distributor undertakes that it shall not knowingly hire any personnel in violation of any restrictive covenants contained in any agreement with a third party or any other obligations owed to any third party, and Distributor shall procure that none of its subdistributors, agents, officers, directors, employees or representatives shall do so. Distributor shall also assure that any and all subdistributors, agents, officers, directors, employees or representatives engaged or employed by it are not subject to any such obligations.

3. OBLIGATIONS OF RESTORE

     3.1 Sales and Technical Literature. Restore shall provide to Distributor reasonable quantities of such sales and technical literature and materials as Restore may have prepared and shall make available copies of promotional artwork it may have prepared. At its option, Restore may provide the same to Distributor in electronic format. Distributor shall use such materials solely as provided under this Agreement. Distributor shall not alter such materials or use any other materials in connection with the marketing and distribution of Products hereunder without Restore’s prior written consent. Notwithstanding the above, Distributor shall translate all materials into the language or languages required by law or appropriate to the Territory, and shall provide Restore with copies of such translations for approval prior to their first use. Restore retains all right, title and interest in and to such materials and to all translated versions thereof.

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     3.2 Marketing and Technical Support. Restore will provide Distributor with such other marketing support as the parties may mutually agree, including providing training with respect to the Products to Distributor’s employees at Distributor’s expense.

     3.3 Export of Products. Restore shall be responsible for obtaining U.S. export licenses for the Products. Distributor shall cooperate with Restore with respect to export licenses, including supplying Restore on a timely basis with such information and documentation as Restore shall request in connection therewith.

     3.4 Special Programs. Restore may, in its sole discretion from time to time during the term of this Agreement, offer to Distributor certain promotional items related to the Products and discounts from the then-current prices for the Products, in order to support certain time- and volume-limited promotional and sales programs instituted by Restore. Special programs offered by Restore as of the Effective Date are set forth in Exhibit C, which may be modified by Restore from time to time during the term of this Agreement upon notice to Distributor. In no event shall Restore be obligated to offer, or continue to offer, any special programs under this Agreement.

4. PURCHASES AND PAYMENT TERMS

     4.1 Orders. Distributor shall submit orders pursuant to Restore procedures as communicated to Distributor from time to time. Distributor shall confirm all oral orders in writing (preferably by e-mail or facsimile). All orders from Distributor are subject to acceptance in writing by Restore, which acceptance may be delivered by reply e-mail or facsimile. No accepted order may be modified or canceled except as agreed in writing by the parties. Distributor’s orders or mutually agreed change orders shall be subject to all provisions of this Agreement. Any terms or conditions of such order or change order which conflict with the terms or conditions of this Agreement shall be deemed excluded.

     4.2 Fulfillment of Orders. Distributor’s purchase orders shall include shipping instructions and shipping address and, if applicable, any relevant export control information or documentation to enable Restore to comply with applicable U.S. export control laws. Restore shall use its best efforts to fill orders that are within Distributor’s forecast within fourteen (14) business days. Restore shall use reasonable efforts to fill orders to the extent they exceed Distributor’s forecast.

     4.3 Delivery Terms. Distributor shall insure each shipment of the Products with a reputable insurer for the full invoice price of such shipment. Such insurance shall provide for coverage from delivery of the Products at the Free Carrier point, Restore’s facility in St. Paul, Minnesota, U.S.A.

     4.4 Acceptance of Products. In the event of any shortage, damage or discrepancy in or to a shipment of Products, Distributor shall promptly report the same to Restore and furnish such written evidence or other documentation as Restore may deem appropriate. Restore shall not be liable for any such shortage, damage or discrepancy unless Restore has received notice and evidence thereof from Distributor within ten (10) days after delivery of the Products. If such evidence demonstrates to Restore’s satisfaction that Restore is responsible for such shortage, damage or discrepancy, Restore shall promptly deliver additional or substitute Products to

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Distributor, but in no event shall Restore be liable for any additional costs, expenses or damages incurred by Distributor directly or indirectly as a result of such shortage, damage or discrepancy in or to a shipment. Distributor shall return any excess or damaged Products as directed by Restore.

     4.5 Prices. Distributor shall pay Restore the prices for the Products as listed in Exhibit B hereto. Restore may increase its prices for the Products upon one hundred eighty (180) days written notice. Increased prices shall not apply to any purchase order accepted prior to the effective date of the price increase unless the order provides for delivery more than one hundred twenty (120) days after acceptance of the order. Prices are quoted in U.S. dollars, and include charges for freight and insurance. Taxes, duties and the like shall be the sole responsibility of Distributor. Any special packing or handling requested by Distributor shall be at the sole expense of Distributor.

     4.6 Payment Terms. Subject to credit review and credit limits which may be established by Restore in its sole discretion, payment for each shipment shall be paid within sixty (60) days of receipt of Restore’s invoice by wire transfer or check drawn on a U.S. bank designated by Restore. All payments shall be made in U.S. dollars. Any overdue payment from Distributor to Restore under this Agreement shall accrue interest at the lesser of one and one-half percent (1.5%) per month or the highest rate permitted under applicable law. Restore shall have the right to recover its collection costs and expenses (including attorneys’ fees) for late payments. Restore reserves the right to withhold or suspend shipment of Products if there is any overdue balance owed by Distributor to Restore and to modify the payment terms set forth in this Section 4.6.

     4.7 Resale Prices. Distributor may offer the Products in the Territory at such prices as Distributor, in its sole discretion, shall determine.

     4.8 Product Changes. Restore may do the following upon written notice and without liability to Distributor:

(a)	Discontinue the sale of one or more Products; or
(b)	Commence the development and distribution of new products or of modifications or improvements to the Products having features which may make the Products wholly or partially obsolete, whether or not Distributor is granted any distribution rights in respect of such new or modified products.

     4.9 Net Payments. All payments to be made by Distributor to Restore pursuant to this Agreement represent net amounts Restore is entitled to receive and shall not be subject to any deductions for any reason whatsoever, including duties, assessments, taxes and bank charges.

5. WARRANTY; LIMITATION OF DAMAGES

     5.1 Limited Warranty. Restore warrants that the Products will conform to the then-current specifications published by Restore for a period of ninety (90) days after delivery thereof to Distributor under this Agreement. The foregoing warranty, or such other warranty of which Restore may notify Distributor in writing from time to time, is the sole and exclusive warranty

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made by Restore relating to the Products. Distributor agrees that it alone shall be liable, to the exclusion of Restore, for the breach of any other warranty given by Distributor to its customers or others regarding the Products. Restore’s obligation in the event of a breach of Restore’s warranty shall be limited replacement of the relevant Product. Distributor shall cooperate with Restore to provide such remedies to purchasers of the Products in the Territory. THE LIMITED WARRANTY SET FORTH IN THIS SECTION 5.1, OR ANY SUCCESSOR WARRANTY, IS IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, WHICH ARE HEREBY DISCLAIMED, INCLUDING WITHOUT LIMITATION ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE.

     5.2 Limitation of Damages. RESTORE SHALL NOT BE LIABLE TO DISTRIBUTOR OR ANY THIRD PARTY FOR ANY LOSS OR DAMAGE CAUSED BY DELAY IN FURNISHING THE PRODUCTS UNDER THIS AGREEMENT OR ANY OTHER PERFORMANCE UNDER THIS AGREEMENT. NEITHER PARTY SHALL HAVE ANY LIABILITY OF ANY KIND TO THE OTHER PARTY OR ANY THIRD PARTY FOR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL LOSSES OR DAMAGES, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH POTENTIAL LOSS OR DAMAGE BY THE OTHER PARTY OR ANY THIRD PARTY. IN NO EVENT SHALL RESTORE BE LIABLE FOR ANY DAMAGES IN EXCESS OF THE AGGREGATE AMOUNTS ACTUALLY PAID BY DISTRIBUTOR TO RESTORE UNDER THIS AGREEMENT.

6. INDEMNIFICATION

     6.1 Indemnification by Restore. Restore hereby agrees to indemnify, defend and hold Distributor harmless from any damages awarded against Distributor (including, without limitation, reasonable costs and legal fees thereby incurred by Distributor) arising out of any suit, claim or other legal action (“Legal Action”) brought by a third party that alleges the Products, or any of them, infringe any United States patent, copyright, or trade secret. If a Product is found to infringe any such third party intellectual property right in such a Legal Action, at Restore’s sole discretion and expense, Restore may (a) obtain a license from such third party for the benefit of Distributor; (b) replace or modify the Product so that it is no longer infringing; or (c), if neither of the foregoing is commercially feasible, terminate this Agreement with no further liability to Distributor.

     6.2 Indemnification by Distributor. Distributor hereby agrees to indemnify, defend and hold Restore harmless from any damages, costs or liabilities (including, without limitation, any reasonable costs or legal fees thereby incurred by Restore) arising out of any Legal Action that arises from or results out of the marketing, distribution or sale of the Products by Distributor, including, without limitation, (a) any act or omission by Distributor or any of its subdistributors or agents; (b) any unfair business practice of Distributor or any of its subdistributors or agents; or (c) any violation by Distributor or any of its subdistributors or agents of any law, regulation or order of the Territory.

     6.3 Indemnification Procedure. A party seeking indemnification (an “indemnified party”) shall give the other party (an “indemnifying party”) written notice of any Legal Action within ten (10) days of first knowledge thereof. The indemnifying party shall have sole and

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exclusive control of the defense of any Legal Action, including the choice and direction of legal counsel. The indemnified party shall have the right to engage its own counsel, at its own expense. The indemnified party may not settle or compromise any Legal Action without the written consent of the indemnifying party.

7. CONFIDENTIALITY

     7.1 Confidential Information; Term. All Confidential Information (as defined below) shall be deemed confidential and proprietary to the disclosing party. Each party may use the Confidential Information disclosed by the other party during the term of this Agreement only as permitted or required for its performance hereunder. Neither party shall disclose or provide any Confidential Information of the other party to any third party and shall take reasonable measures to prevent any unauthorized disclosure by its employees, agents, contractors, consultants or permitted subdistributors, including appropriate individual nondisclosure agreements. The foregoing duty shall survive for five (5) years after any termination or expiration of this Agreement.

     7.2 Definition. As used in this Agreement, the term “Confidential Information” shall mean all information disclosed by Restore to Distributor, or by Distributor to Restore, including without limitation customer lists, information that is embodied in the Products, or any information regardless of the form in which it is disclosed that relates to a party’s markets, customers, products, patents, inventions, procedures, methods, designs, strategies, plans, assets, liabilities, prices, costs, revenues, profits, organization, employees, agents, resellers or business in general. The following shall not be considered Confidential Information for purposes of this Article 7:

(a)	Information which is or becomes in the public domain through no fault or act of the receiving party;
(b)	Information which was independently developed by the receiving party without the use of or reliance on Confidential Information of the other party;
(c)	Information which was provided to the receiving party by a third party under no duty of confidentiality to the disclosing party; or
(d)	Information which is required to be disclosed by law, provided, however, prompt prior notice thereof shall be given to the disclosing party and disclosure shall be limited to the maximum extent possible.

8. TRADEMARKS

     8.1 Use of Trademarks. Subject to the terms and conditions of this Agreement, Restore hereby grants to Distributor, and Distributor hereby accepts from Restore, a nonexclusive, nontransferable license to use the Restore trademarks specified in Exhibit A hereto, as the same may be revised by Restore from time to time, during the term of this Agreement, solely in connection with the distribution, promotion and advertising of the Products in the Territory, and solely in accordance with Restore’s standards and instructions. Distributor may use the Restore trademarks in promotional brochures and in connection with trade fairs only

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with Restore’s prior written consent. Distributor shall not use any other marks or trade names in connection with the marketing and distribution of the Products. Restore may inspect and monitor Distributor’s use of the Restore trademarks. Distributor shall not remove or alter any Restore trade names, trademarks, copyright notices, catalogue and lot numbers, labels, tags or other identifying marks, symbols or legends affixed to any Products, documentation or containers or packages. Distributor shall not adopt, use or register any words, phrases or symbols which are identical to or confusingly similar to any of Restore’s trademarks.

     8.2 Ownership. Distributor acknowledges and agrees that Restore is the owner of all rights in the Restore trademarks, that all use of the Restore trademarks by Distributor shall inure to the benefit of Restore, that Distributor will not take any action which is inconsistent with Restore’s ownership of the Restore trademarks and that, upon termination of this Agreement, all rights in the Restore trademarks, including the goodwill connected therewith, shall remain the property of Restore.

     8.3 Registration and Enforcement. Restore shall be solely responsible for, and may exercise its sole discretion in, deciding whether to apply for and prosecute applications for registration of the Restore trademarks in any jurisdiction and whether to maintain any such registrations therefor. Distributor shall give Restore immediate notice in writing of any infringement or threatened infringement of the Restore trademarks of which Distributor becomes aware. In any such case, Restore shall have complete discretion whether to institute proceedings for infringement of the Restore trademarks and complete discretion and control over such proceedings, and Distributor shall cooperate fully with Restore in any such proceedings with such third parties, provided that Restore shall pay all expenses of such action and all damages which may be awarded or agreed upon in settlement of such proceedings shall accrue to Restore.

9. TERM AND TERMINATION

     9.1 Term. This Agreement shall take effect on the Effective Date and shall continue for an initial term of three (3) years, unless terminated earlier pursuant to the terms of this Article 9. This Agreement may be renewed for additional one (1) year extensions after the expiration of its initial term upon mutual written agreement of the parties. If such renewal has not been agreed to by the parties in writing at least three (3) months prior the end of the initial or any renewal term, then this Agreement shall terminate at the end such term and Restore shall immediately be free to make other arrangements regarding the future distribution and sale of the Products in the Territory.

     9.2 Termination. This Agreement may be terminated prior to expiration as follows:

(a)

Either party may terminate this Agreement with written notice to the other party if the other party files a petition of any type as to its bankruptcy, is declared bankrupt, becomes insolvent, makes an assignment for the benefit of creditors, goes into liquidation or receivership, otherwise loses legal control of its business involuntarily, or discontinues its business operations related to this Agreement.

(b)

Either party may terminate this Agreement if the other party is in material breach of this Agreement (including but not limited to Distributor’s failure to pay

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	promptly sums owing to Restore or Distributor’s breach of Section 1.3) and has failed to cure such breach within thirty (30) days of receipt of written notice thereof from the first party.
(c)	Restore may terminate this Agreement immediately upon written notice to Distributor if:

(i)	Distributor has failed to meet the applicable Minimum Purchase Requirements for the Products, as set forth in Exhibit A, in any particular contract year, or the parties have not agreed upon the Minimum Purchase Requirements for the Products for any particular year as provided in Section 2.2;
(ii)	an act or omission of Distributor or Distributor’s employees, officers, subdistributors or agents is likely, in the sole discretion of Restore, to cause or has caused harm or disrepute to the reputation of Restore or the Products, or harm to the public;
(iii)	there is a material change in the management of or operation of Distributor’s business, or any change in the ownership (including ownership of shares of Distributor) or control of Distributor;
(iv)	Distributor breaches any obligation regarding Restore’s intellectual property, alters any Product or the labeling therefor without Restore’s prior written consent or sells a Product beyond its expiration date; or
(v)	in the sole opinion of Restore, any law or government-enacted regulation or decree renders the performance by either party of its respective obligations hereunder unduly onerous or otherwise inexpedient; or
(vi)	Restore ceases to sell the Products.

(d)	Either party may terminate this Agreement immediately upon written notice to the other party if an event of force majeure (as described in Section 11.2 below), which affects the performance of the other party, continues for more than six (6) months.
(e)	Either party may terminate this Agreement with sixty (60) days prior written notice to the other party if this Agreement is assigned by the other party as a result of a merger, acquisition, or sale of all or substantially all of the assets of the other party, and the first party does not consent to such assignment, which consent will not be unreasonably withheld.

     9.3 Partial Termination. In the event that Restore shall have the right pursuant to the provisions of Section 9.2 to terminate this Agreement in its entirety, Restore may elect, in its sole discretion, to terminate this Agreement solely as it applies to any portion of the Territory.

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     9.4 Rights and Obligations on Termination. In the event of termination of this Agreement for any reason, the parties shall have the following rights and obligations:

(a)	Neither party shall be released from the obligation to make payment of all amounts then or thereafter due and payable;
(b)	The following Sections and Articles shall survive any termination or expiration of this Agreement: Sections 1.2 (but only to the extent Distributor is obligated to indemnify Restore), 2.3, 2.5, 2.7, 2.8, 2.11, 2.13, 8.3, and Articles 5, 6, 7, 9, 10 and 11;
(c)	Distributor shall cease to distribute the Products and shall return to Restore, at Distributor’s expense, all copies of promotional and technical materials and artwork provided by Restore;
(d)	Restore may, at its option, repurchase Distributor’s inventory of non-obsolete and nonexpired Products at the price paid by Distributor for such Products or direct Distributor to sell them to the third party or parties selected by Restore;
(e)	Each party shall return or, if requested by the other party, destroy all Confidential Information of the other party, including, if applicable, all electronic copies thereof and shall certify in writing that it has done so; and
(f)	Upon the effective date of termination or expiration of this Agreement, Distributor shall immediately cease any use of the Restore trademarks in any manner, or any confusingly similar imitation thereof, and shall destroy all packaging, advertising material, labels and other printed materials bearing the Restore trademarks. In addition, Distributor hereby empowers Restore and shall assist Restore, if requested, to cancel, revoke or withdraw any governmental registration or authorization permitting Distributor to use Restore trademarks in the Territory.

     9.5 No Compensation. In the event of any expiration or termination of this Agreement for any reason, neither party shall owe any compensation to the other party for lost profits, lost opportunities, goodwill, or any other loss or damage as a result of or arising from such termination or expiration. Distributor acknowledges that Restore may terminate this Agreement in the manner provided in this Article 9, that Distributor has not paid any consideration for the right to act as Restore’s distributor in the Territory, and that Restore has agreed to enter into this Agreement on the express condition that Distributor will not be entitled to any compensation for its termination or non-renewal.

10. ARBITRATION

     10.1 Litigation Rights Reserved. If any dispute arises with respect to the unauthorized use of Confidential Information, Restore’s trademarks or other intellectual property of Restore by Distributor, or with respect to acts or omissions of Distributor relating to the Products which in the judgment of Restore, negatively impact the reputation of Restore or the Products or the

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safety of the public, the aggrieved party may seek any available remedy at law or equity from a court of competent jurisdiction, in addition to its right to arbitration as provided in Section 10.2.

     10.2 Arbitration. Except as provided in Section 10.1 above, any dispute, claim or controversy which shall arise out of or in relation to this Agreement, or the breach thereof, shall be finally settled by binding arbitration at Minneapolis, Minnesota, U.S.A. in accordance with the International Arbitration Rules of the American Arbitration Association (“AAA”). Any such arbitration shall be conducted by three (3) arbitrators appointed by mutual agreement of the parties or, failing such agreement, in accordance with the AAA rules. At least one (1) arbitrator shall be an experienced biomedical device professional, and at least one (1) arbitrator shall be an experienced business attorney with background in the licensing and distribution of biomedical devices. The arbitration shall be conducted in the English language. Notwithstanding any contrary provisions in the AAA rules, each party shall bear its own costs and expenses of the arbitration and one-half (1/2) of the fees and costs for the arbitrator unless the arbitrator determines the fees and costs should be borne by one of the parties. The arbitrator may not award or assess punitive damages against either party.

     10.3 Governing Law. This Agreement shall be construed and interpreted in English. This Agreement shall also be governed by, and interpreted and construed in accordance with, the laws of the State of Minnesota, U.S.A., excluding its choice of law rules and the United Nations Convention on the International Sale of Goods, provided that enforcement and operation of the arbitration agreement contained in Section 10.2 hereof, and the enforcement of any award rendered pursuant thereto, shall be governed by United States federal law to the exclusion of State law.

11. MISCELLANEOUS

     11.1 Compliance with Laws. Distributor shall comply with all applicable laws affecting this Agreement and its performance hereunder, including, without limitation, the U.S. Foreign Corrupt Practices Act, and any restrictions on the export of the Products under the U.S. Export Administration Regulations. Without limiting the generality of the foregoing sentence, Distributor shall maintain all registrations with governmental agencies, commercial registries, chambers of commerce, or other offices which may be required under local law in order to enable it lawfully to conduct its business and perform its obligations under this Agreement. Upon written notice from Restore, Distributor shall provide such information as Restore shall reasonably consider necessary to verify compliance by Distributor with the provisions of this Section 11.1.

     11.2 Force Majeure. If the performance of this Agreement or any obligation hereunder (other than the payment of monies due owing hereunder) is prevented, restricted or interfered with by reason of any event or condition beyond the reasonable control of such party (including without limitation acts of state or governmental action, riots, disturbance, war, strikes, lockouts, slowdowns, prolonged shortage of energy or other supplies, epidemics, fire, flood, hurricane, typhoon, earthquake, lightning and explosion, or any refusal or failure of any governmental authority to grant any export license legally required), the party so affected shall be excused from such performance, only for so long as and to the extent that such a force prevents, restricts or

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interferes with the party’s performance and provided that the party affected gives notice thereof to the other party and uses diligent efforts to remedy such event or conditions.

     11.3 Relationship. This Agreement does not make either party the employee, agent or legal representative of the other for any purpose whatsoever. Neither party is granted any right or authority to assume or to create any obligation or responsibility, express or implied, on behalf of or in the name of the other party. Each party is acting as an independent contractor.

     11.4 Assignment. Distributor shall not have the right to assign or otherwise transfer its rights and obligations under this Agreement except with the prior written consent of Restore. Any prohibited assignment shall be null and void. This Agreement will be binding on the parties hereto and their successors and permitted assignees.

     11.5 Notices. Notices permitted or required to be given hereunder shall be given to the parties at the addresses set forth below or such other address of which a party may notify the other party in writing,:

To Restore:	Restore Medical, Inc.
	2800 Patton Road
	Roseville, MN 55113 USA
	Fax: 651-634-3025 Attention: Sr. VP of Commercial Operations
To Distributor:	Sonomed Ltd Hatizmoret Str. 40/42 Rishon Le Zion, 75562, Israel Fax: +972 3 9515490 Attention: Shimon Aharon

Notices shall be deemed sufficient if given by (a) registered or certified mail, postage prepaid, return receipt requested, (b) private courier service, or (c) facsimile with electronic confirmation of receipt, addressed to the respective addresses of the parties as first above written or at such other addresses as the respective parties may designate by like notice from time to time. Notices so given shall be effective upon (1) receipt by the party to which notice is given, or (2) on the fifth (5th) day following domestic mailing or the tenth (10th) day following international mailing, as may be the case, whichever occurs first.

     11.6 Entire Agreement. This Agreement, including the Exhibits hereto which are incorporated herein, constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes all proposals, oral or written, and all negotiations, conversations, discussions or previous distribution agreements or arrangements heretofore between the parties. Distributor hereby acknowledges that it has not been induced to enter into this Agreement by any representations or statements, oral or written, not expressly contained herein.

     11.7 Amendment. This Agreement may not be modified, amended, rescinded, canceled or waived, in whole or in part, except by written amendment signed by both parties.

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     11.8 Severability. If any provision of this Agreement is found unenforceable under any of the laws or regulations applicable thereto, such provision terms shall be deemed stricken from this Agreement, but such invalidity or unenforceability shall not invalidate any of the other provisions of this Agreement.

     11.9 Counterparts. This Agreement may be executed in two or more counterparts in the English language, and each such counterpart shall be deemed an original hereof. In case of any conflict between the English version and any translated version of this Agreement, the English version shall govern.

     11.10 Waiver. No failure by either party to take any action or assert any right hereunder shall be deemed to be a waiver of such right in the event of the continuation or repetition of the circumstances giving rise to such right.

[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

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     IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives below.

Restore Medical, Inc.		Sonomed, Ltd.
By	/s/ Susan L. Critzer	By	/s/ Aharon Shimon
Name: Susan L. Critzer		Name: Aharon Shimon
Title: President & CEO		Title: General Manager

Exhibit List
A	Territory, Products, Minimum Purchase Requirements, Trademarks
B	Pricing and Special Programs
C	Special Programs

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EXHIBIT A

Territory:

Israel

Products:

Distributor may purchase and resell the following RMI products:

Pillar^® Palatal Implant System (Part Numbers PDS-1000,PDS-2000, PDS-3000, or PDS-4000)

Restore Trademarks:

Minimum Purchase Requirements:

Distributor agrees to purchase and take delivery of a minimum of one thousand (1000) Products (net of returns) during the first twelve (12) month period of this Agreement, which shall be purchased by Distributor in the following increments: (a) two hundred fifty (250) Products no later than thirty (30) days after approval of the Product by the appropriate authorities in the Territory (the “Initial Order”); (b) two hundred fifty (250) Products by the earlier of                                         , or one hundred twenty (120) days after receipt of the Initial Order by Restore; (c) two hundred fifty (250) Products by the earlier of                                         , or two hundred ten (210) days after receipt of the Initial Order by Restore; and (d) two hundred fifty (250) Products by the earlier of                                          or three hundred (300) days after receipt of the Initial Order by Restore.

EXHIBIT B

PRICING

	Product Number	Each Price
One Each	PDS-1000, 2000, 3000, or 4000	$115 ea up to 1000 devices purchased within first year and $105 each for all devices over 1000 purchased in first year
		In year 2, $125 each

EXHIBIT C

SPECIAL PROGRAMS

1. Practice Introduction Program:

The Practice introduction program provides distributors the ability to offer no-charge product to physicians during the practice introduction process. Restore Medical will credit the Distributor for 50% of the cost of up to 9 devices per physician who is trained using the program and for whom no-charge product was offered. A Practice Introduction Form (see attachment I) must be completed by the implanting physician and provided to Restore Medical to receive credit. All forms will be processed quarterly and credits applied to the Distributor’s account within 30 days of receipt and verification of all documentation.

2. Product Replacement Program:

Restore Medical will provide one-for-one replacement product to the Distributor upon notification with documentation by an implanting physician that an implant had to be removed and replaced.

3. Demonstration Product Program:

Restore Medical will provide the Distributor an initial supply of twenty-five (25) not-for-sale, not-for-human use demonstration devices and 100 individual implants. Additional demonstration devices will be made available as necessary and as agreed upon by Restore Medical and the Distributor.

ATTACHMENT I TO EXHIBIT C

Practice Introduction

Date Distributor

Physician Name
	(first, last)

Address

Number of Patients Treated	Snoring	OSA
Number of Implants Used
Lot Number (s)

Thank you for evaluating the Pillar Palatal Implant product. Please sign below to confirm you have used the number of no-charge implants, as indicated above.

Physician Signature:

EX-10.14 20 c01111s1exv10w14.htm RESEARCH AND DEVELOPMENT AGREEMENT

Exhibit 10.14

Pi Medical, Inc.
Research and Development Agreement

This Agreement is made effective the 11^th day of August, 2000 by and between Pi Medical, Inc., (“Pi Medical”) a Minnesota corporation, whose principal place of business is 2800 Patton Road, St. Paul, MN 55113, and Advanced Composites Industries, Inc., 3620 Horizon Drive, King of Prussia, PA 19072 (“ACI”). In consideration of the mutual covenants and promises set forth herein, the parties hereby agree as follows:

1. Term: Unless terminated as hereafter provided, this Agreement shall begin on the above effective date and end on October 15, 2000 unless earlier terminated below. The parties may negotiate one or more renewals of this Agreement.

2. Relation to Other Agreements: An earlier agreement and Exhibit A between the parties dated July 5, 2000 calling for 5,000 units of 3-D Braided Pi Medical Devices (“Manufacturing Agreement”) is suspended herewith. The parties intend that a product specification arising from this Agreement with then be a substitute specification for the Manufacturing Agreement.

3. Duties: Duties will be assigned by Pi Medical and will involve consulting in the area of device design and development for use in snoring or sleep apnea treatment and manufacturing of such product. As part of these duties, ACI will use its best efforts to design and produce prototype 3-D braided structures in accordance with Pi Medical Design Specifications (PMDSs). ACI will focus initially on PMDSs #100018-600 and #100018-700. Other designs may include round structures such as PMDSs #100018-300, 400, 500, 800 and/or other more complex structures as mutually determined by Pi Medical and ACI. The number of designs and prototypes produced under this program will depend on the PMDSs selected. As such, this program is based on a two month level of effort by ACI, rather than a guaranteed number of designs and prototypes delivered. ACI currently projects each design and prototype iteration of PMDSs #100018-300 through 800 to last about 8 days, with 2 — 3 days of design and 5 — 6 days of prototyping. More complex structures will take longer to design and prototype. These projections do not include lead times for procuring materials and other items such as yarns, monofilaments, carriers, dies, etc.

4. Compensation:

A. This contract will be performed by ACI on a time and materials basis with a fixed (%) fee. ACI will bill Pi Medical for the actual time spent and actual materials, subcontracts, ACIs, travel, shipping and other direct costs purchased on this program by ACI plus a fixed fee.

Page 1 of 4

B. ACI will bill Pi Medical based on the following Labor Categories and Labor Rates:

Labor Category	Labor Rate
Program Management	$172.50	/hr.
Senior Design Engineer	$172.50	/hr.
Manufacturing Engineer	$  51.75	/hr.
Manufacturing Technician	$  46.00	/hr.

C. Based on the above Effective Dates, Costs, required Level of Effort for PMDSs 1000 18-300 through 800, and a limited materials and other direct costs requirement, ACI currently projects this program to have a total value of about $70,000.00.

5. Termination: Pi Medical may terminate this Agreement prior to the conclusion date but shall remain liable for all costs and fixed fee incurred up to the date of termination.

6. Authority: ACI shall not have the right to bind Pi Medical or commit Pi Medical to any agreement or understanding with any third party whatsoever.

7. Confidential Information: Because of the confidential nature of the information which will be disclosed to ACI under this Agreement, ACI will not, except as authorized by Pi Medical, disclose such confidential information to any other third party or company. The obligation of confidentiality shall not be applicable with respect to such information which: (A) was known to ACI prior to disclosure, (B) is or becomes known to the public by general publication without violation of this Agreement, (C) is given to ACI by a third party having a right to do so, or (D) is independently developed by ACI without the use of information supplied by Pi Medical under this Agreement.

8. Exclusivity: Because of the confidential nature of the information, which will be disclosed to ACI under this Agreement, ACI will not do any other consulting, research or development work in the area of snoring treatment involving an implant to stiffen the soft palate without prior approval by Pi Medical during the duration of this Agreement and for one year thereafter.

9. Ownership of Inventions and Patents:

A. Pi Medical Ownership

     If any patentable inventions result from performance of this Agreement, all rights under any patents that may issue on those inventions shall belong exclusively to Pi Medical. ACI hereby assigns and agrees to assign in the future all such inventions to Pi Medical without further payment from Pi Medical. ACI also agrees that, upon Pi Medical’s request and at Pi Medical’s expense, he/she would provide reasonable assistance to Pi Medical in prosecuting patents covering those inventions. All information, including copyrights, developed by ACI under this Agreement shall belong to Pi Medical and all copyrightable works are works made for hire and ACI hereby assigns and agrees to assign to Pi Medical such rights now and in the future. The

Page 2 of 4

obligations to assign inventions and copyrights to Pi Medical shall not apply to any invention or copyright for which no equipment, supplies, facility or trade secret information of Pi Medical was used and which was developed entirely on the ACI’s own time, and (1) which does not relate (a) directly to the business of Pi Medical or (b) to Pi Medical’s actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by the ACI for Pi Medical.

B. Grant Back to ACI

     Pi Medical grants ACI a paid-up, non-exclusive license to make, use or sell an invention of paragraph 9.A., above, only to the extent any final or intermediate use of such invention by ACI or any customer or end-user is limited to a field of use not including treatment of snoring, sleep apnea, sleep or breathing disorder or any implant for stiffening tissue for use in the nasal, oral or pharyngeal regions.

10. Notices: All notices required or permitted by this Agreement shall be in writing and shall be delivered in person or sent by certified or registered mail, return receipt required, postage paid to the addresses stated above or to other’s address as either party may designate. All mailing notices shall be deemed effective upon depositing in the mail.

11. Waiver: The waiver of either party of a breach of any provision of this Agreement shall not operate as or be construed as a continuing waiver or as a consent to or waiver of such subsequent breach.

12. Modification: This Agreement may only be modified in writing signed by both parties.

13. Non-assignable: Since the services to be provided under this Agreement are personal, all duties to be executed by ACI shall be performed by ACI and may not be assigned or delegated without written consent of Pi Medical.

14. Entire Agreement: This Agreement constitutes the entire Agreement between the parties with respect to the subject matter hereof and supersedes all previous agreements and understandings rather oral or written between the parties with respect to the subject hereof.

15. Governing Law: This Agreement shall be governed by the laws of the State of Minnesota.

Page 3 of 4

     In witness thereof, the parties have set forth their hand hither and to on the date indicated below.

PI MEDICAL, INC.		ADVANCED COMPOSITES
		INDUSTRIES, INC.
By:	/s/ Timothy R. Conrad	By:	/s/ George C.H. Chou
Printed Name: Timothy R. Conrad		Printed Name: George C.H. Chou
Title: Vice President		Title: President
Date: August 29, 2000		Date: August 21, 2000

Page 4 of 4

May 17, 2002

George Chou
Advanced Composites Industries, Inc. 3620 Horizon Dr.
King of Prussia, PA 19046

SUBJECT: Closing out August 1, 2001 Contract

George,

After reviewing the correspondence related to the last several lots of implants shipped against the August 1, 2001 contract, it appears that we are not in agreement on the “accept/reject” status of those units.

Our position is that the returned units do not meet the requirements of Pi Medical drawing numbers 400005 and 100029 as required in the August 1, 2001 contract. Your correspondence with us indicates that you disagree with this position.

It appears that this issue will not be resolved in the short-term. Rather than continue to debate the issue, we would like to propose the following so that we may close out the August 1, 2001 contract:

– Return the “rejected” lots to Pi Medical.

– Pi Medical will complete the final payment for the August 1, 2001 contract.

– Pi Medical will absorb any costs associated with reduced production yields from these lots.

– ACI will not bill Pi Medical for any costs associated with investigating this issue.

At this time, we do not have an immediate need for additional implants or development work. No additional work should be performed at ACI until a new contract is signed.

Acceptance of the final payment is confirmation that all obligations of the August 1, 2001 contract have been met. If you have any questions, please contact me at 651-634-3062.

Sincerely,

John Sopp

Cc:	Terry O’Brien
	Sue Critzer
	Anja Metzger
	Shannon Witkowski

PI MEDICAL, INC.

AMENDMENT TO AGREEMENT

     This Amendment amends an agreement dated the 1^st day of August, 2001 (the “Original Agreement”) by and between Pi Medical, Inc. (“Pi Medical”), a Minnesota corporation, whose principal place of business is 2800 Patton Road, St. Paul, MN 55113, and Advanced Composite Industries, Inc. (“ACT”) whose address is 3620 Horizon Drive, King of Prussia, PA 19072.

     For mutual consideration received, the term of the Original Agreement is hereby extended one month (effective February l, 2002 through February 28, 2002).

     All other terms and conditions remain unchanged.

Agreed to by:

PI MEDICAL, INC.		ADVANCED COMPOSITES
		INDUSTRIES, INC.
By:	/s/ Susan L. Critzer	By:	/s/ George C.H. Chou
Printed Name: Susan L. Critzer		Printed Name: George C.H. Chou
Title: Chief Operating Officer		Title: President
Date: January 29, 2002		Date: January 31, 2002

AGREEMENT

     Effective August 1, 2001 (“Effective Date”), Advanced Composite Industries, Inc., 3620 Horizon Drive, King of Prussia, PA 19072 (“ACT”) and Pi Medical, Inc., 2800 Patton Road, St. Paul, MN 55113 (“Pi Medical”) agree as follows:

1. Replacement of Earlier Agreement

A.	This Agreement supercedes and replaces an original Agreement entitled “Pi Medical, Inc. Research and Development Agreement (“Original Agreement”) executed by the parties on August 11, 2000. Through agreement of the parties, all terms of the Original Agreement had been extended beyond the original termination date up to and including the Effective Date of this Agreement.
B.	As of the Effective Date all obligations (except for continuing obligations of confidentiality and duty to disclose inventions as recited in the Original Agreement) of the parties under the Original Agreement have been faithfully concluded by both parties except only for June 2001 and July 2001 invoices not yet received by Pi Medical.

2. Term: Unless terminated as hereafter provided, this Agreement shall begin on the above Effective Date and end on January 31, 2002 unless earlier terminated below. The parties may negotiate one or more renewals of this Agreement.

3. Project Plan

A.	ACI will make such implants according to the attached quotation of Appendix A and Pi Medical will pay according to the terms of Appendix A.
B.	The parties will agree on a Project Schedule which will include all project activities, estimated cost, lead-time and agreed notations of the parties as to whether any listed activity is either authorized or on hold.

4. Audit Preparation and Cooperation

ACI understands Pi Medical intends to successfully complete an ISO certification audit by the end of October, 2001 (“Anticipated Audit Date”). ACI agrees to an audit by Pi Medical or a third party as part of the Pi Medical audit by the Anticipated Audit Date and will cooperate with Pi Medical in preparation for and during such audit. By the Anticipated Audit Date, ACI will have documentation of the manufacturing processes of the braids made under this Agreement completed in compliance with Pi Medical’s quality systems. Alternatively, ACI may choose to assure the manufacturing process and quality requirements for the production of Pi Medical’s braids by developing their own Standard Operating Procedures to fully document the manufacturing system for the braids made under this Agreement. This ACI Quality System must be sufficient to successfully

complete an audit by one month after the Anticipated Audit Date. In this Section 4, time is of the essence.

5. Confidential Information

A.

Because of the confidential nature of the information which will be disclosed to ACI under this Agreement, ACI will not, except as authorized by Pi Medical, disclose such confidential information to any other third party or company. The obligation of confidentiality shall not be applicable with respect to such information which: (A) was known to ACI prior to disclosure, (B) is or becomes known to the public by general publication without violation of this Agreement, (C) is given to ACI by a third party having a right to do so, or (D) is independently developed by ACI without the use of information supplied by Pi Medical under this Agreement.

B.

Because of the confidential nature of the information, which will be disclosed to ACI under this Agreement, ACI will not do any other consulting, research or development work in the area of snoring treatment involving an implant to stiffen the soft palate without prior approval by Pi Medical during the duration of this Agreement and for one year thereafter.

6. Ownership and Inventions

A. Pi Medical Ownership

If any patentable inventions result from performance of this Agreement, all rights under any patents that may issue on those inventions shall belong exclusively to Pi Medical. ACI hereby assigns and agrees to assign in the future all such inventions to Pi Medical without further payment from Pi Medical. ACI also agrees that, upon Pi Medical’s request and at Pi Medical’s expense, it will provide reasonable assistance to Pi Medical in prosecuting patents covering those inventions. All information, including copyrights, developed by ACI under this Agreement shall belong to Pi Medical and all copyrightable works are works made for hire and ACI hereby assigns and agrees to assign to Pi Medical such rights now and in the future. The obligations to assign inventions and copyrights to Pi Medical shall not apply to any invention or copyright for which no equipment, supplies, facility or trade secret information of Pi Medical was used and which was developed entirely on the ACI’s own time, and (1) which does not relate (a) directly to the business of Pi Medical or (b) to Pi Medical’s actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by the ACI for Pi Medical.

B. Grant Back to ACI

Pi Medical grants ACI a paid-up, non-exclusive license to make, use or sell an invention of paragraph 6.A., above, only to the extent any final or intermediate use of such invention by ACI or any customer or end-user is limited to a field of

2

use not including treatment of snoring, sleep apnea, sleep or breathing disorder or any implant for stiffening tissue for use in the nasal, oral or pharyngeal regions.

C. Pi Medical retains exclusive ownership of all equipment, tools, fixtures, procedures, documentation paid for by Pi Medical (with exception of a previously authorized and paid $100,000 upgrade to the braiding machine). In the event Pi Medical terminates this Amended Agreement at will, no tool removal fee will be charged to Pi Medical.

7. Billing and Expenses

ACI will invoice Pi Medical monthly for all charges incurred during the preceding month. Billing to Pi Medical shall occur only on activities authorized by Pi Medical.

A.	All time tracking, materials purchases, subcontracting and other expenses must be submitted to Pi Medical on a bi-weekly basis for review within one week of the time that the cost is incurred.
B.	ACI is responsible for accuracy/appropriateness of all time tracking for ACI and subcontractors. Costs associated with errors in execution (as mutually agreed upon by ACI and Pi Medical) shall not be passed onto Pi Medical. Pi Medical reserves the right to audit time cards and billing records.
C.	Subcontractor fees and duties, if any, must be pre-approved by Pi Medical.
D.	Time/material charges for work authorized by Pi Medical will be billed at the rates recited in Appendix A.
E.	It is the intent of the parties that time and material charges to Pi Medical would be driven by technical work related to new designs and development of a quality control system. Costs associated with troubleshooting routine production issues for a braid produced at a fixed unit price would not be charged to Pi Medical. All time and material charges together with all other charges shall be within the budget constraints recited in Appendix A.

8. Authority

ACI shall not have the right to bind Pi Medical or commit Pi Medical to any agreement or understanding with any third party whatsoever.

9. Termination

Pi Medical may terminate this Agreement prior to the conclusion date but shall remain liable for all costs incurred. up to the date of termination. ACI may also terminate but shall be liable for returning all documents, equipment and other property to Pi Medical within 30 days. Pi Medical shall pay shipping costs for all items returned to Pi Medical following termination.

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10. Notices

All notices required or permitted by this Agreement shall be in writing and shall be delivered in person or sent by certified or. registered mail, return receipt required, postage paid to the addresses stated above or to other’s address as either party may designate. All mailing notices shall be deemed effective upon depositing in the mail.

11. Waiver

The waiver of either party of a breach of any provision of this Agreement shall not operate as or be construed as a continuing waiver or as a consent to or waiver of such subsequent breach.

12. Modification

This Agreement may only be modified in writing signed by both parties.

13. Non-assignable

Since the services to be provided under this Agreement are personal, all duties to be executed by ACI shall be performed by ACI and may not be assigned or delegated without written consent of Pi Medical.

14. Entire Agreement

This Agreement constitutes the entire Agreement between the parties with respect to the subject matter hereof and supersedes all previous agreements and understandings rather oral or written between the parties with respect to the subject hereof.

15. Governing Law

This Agreement shall be governed by the laws of the State of Minnesota.

AGREED TO BY:

PI MEDICAL, INC.		ADVANCED COMPOSITES
		INDUSTRIES, INC.
By:	/s/ S. L. Critzer	By:	/s/ George C.H. Chou
	Susan L. Critzer		George C.H. Chou
Title: Chief Operating Officer		Title: President
Date: August 13, 2001		Date: August 17, 2001

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APPENDIX A

A. Unit Braid Price

1.	ACI shall charge a fixed unit price of $22.71 per unit for braids made in accordance with Pi Medical drawing numbers 400005 and 100029.
2.	All products shall conform to specifications on Pi Medical drawing numbers 400005 and 100029.
3.	All manufacturing shall follow the process steps of ACI flowchart dated 6 June 2001 (a reduced-in-size copy attached hereto). Any changes to the flow chart require mutual agreement of the parties.
4.	The unit cost shall include materials, machine set-up, braiding, in-process quality control at ACI, welding, cleaning, packaging, labeling, shipping to Pi Medical, maintaining routine quality control records and equipment maintenance. Attached is a 7/30/01 Braid Quality Control plan listing routine quality control.
5.	The unit cost may be adjusted (increased or decreased) based on requested changes to the process.
6.	The foregoing unit price is based on a delivery schedule of 500 accepted unites delivered in each of the six months of the term of this Agreement with an initial delivery in August, 2001. It is preferred that 250 accepted units be delivered by the 15th of each of said months with the remainder delivered by the end of each of said months. Failure of ACI to deliver accepted units in the quantities described within 30-days of the above-stated due dates is a breach of this agreement.

B. Time and Material Charges

Time/material charges for work authorized by Pi Medical will be billed at the following rates:

1.	ACI Program Management	$125 /hr
2.	ACI Senior Design Engineer	$150 /hr
3.	Subcontract Senior Design Engineer	$150 /hr
4.	ACI Manufacturing Engineer	$  60 /hr
5.	ACI Manufacturing Technician	$  46 /hr
6.	DET subcontract Program Management/QC Engineer	$125 /hr
7.	DET subcontract Mechanical Engineer/Technician	$105 /hr

5

C. Budget Constraint

Monthly charges to Pi Medical shall not exceed $25,000 for any one month with ACI assuming any overage. The monthly budget shall be a monthly average of $20,000 per month and the total cash paid over the term of this Agreement shall not exceed $120,000. The monthly budget is the sum of time and materials and production unit charges for that month.

[ACI Production Flow Chart and Quality Control System]

6

EX-10.15 21 c01111s1exv10w15.htm ASSIGNMENT AND GRANT BACK OF LICENSE AGREEMENT

Exhibit 10.15

ASSIGNMENT
AND
GRANT-BACK OF LICENSE

     This Agreement is effective November 28, 2001 by and between Pi Medical, Inc., 2800 Patton Road, St. Paul, MN 55113 (“Pi Medical”) and Venturi Development Inc., 2800 Patton Road, St. Paul, MN 55113 (“VDI”) (Pi Medical and VDI are collectively referred to as the “Parties”).

     For one dollar and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:

1.	Pi Medical hereby irrevocably assigns to VDI its entire right, title and interest to all copyrights, patents, if any, inventions and supporting documentation and software in all of the standard operating procedures, policies and systems identified in the attached Exhibit A.
2.	VDI hereby grants back to Pi Medical a non-exclusively, worldwide, fully paidup license to all rights assigned in the above Section 1.

Agreed to by:
Pi Medical, Inc.		Venturi Development, Inc.
By:	/s/ Timothy R. Conrad	By:	/s/ Mark. B. Knudson
Printed Name: Timothy R. Conrad		Printed Name: Mark B. Knudson
Its: Vice President		Its: President
Date: November 28, 2001		Date: November 28, 2001

EXHIBIT “A”

Document		Effective
Number	Description	Date	Rev. Level
POLICY-01	Quality Manual Policy	2/28/2002	C
POLICY-02	Information Security File	Pending	—
POLICY-03	Safety policy	Pending	—
SOP1001	Product Design and Development Procedure	12/7/2001	F
SOP1002	Test Management Procedure	1/11/2002	E
SOP1003	Test Protocol / Reporting Procedure	8/1/2001	D
SOP1004	Risk Analysis Procedure	12/17/2001	B
SOP1005	Verification, Validation and Qualification Testing Requirements	11/19/2001	C
SOP1006	Laboratory Notebook & Invention Disclosure Procedure	1/16/2002	C
SOP1007	Use	—	—
SOP1008	Pre-Clinical Studies	8/1/2001	C
SOP1010	Software Development and Validation Manufacturing/Test Software	5/16/2001	A
SOP1011	Product Biocompatibility	12/14/2001	B
SOP3001	Document Generation, Content, and Identification	1/16/2002	F
SOP3002	Change Order	1/16/2002	E
SOP3003	Document and Data Storage and Access	1/8/2002	B
SOP3004	Article Identification: Definition, Description, and Administration	12/11/2001	C
SOP3005	Review, Approval, and Control of Labeling and Literature	10/25/2001	B
SOP3006	Use	—	—
SOP3007	Technical File procedure	3/4/2002	A
SOP3008	Standards Library/Database Procedure	9/11/2001	A
SOP3009	Document Formatting Standards	12/11/2001	B
SOP4001	Supplier Selection, Qualification and Certification Procedure	1/18/2002	D
SOP4002	Supplier Auditing Procedure	1/18/2002	D
SOP4003	Request for Quote/Request for Information Process	7/10/2001	B
SOP4004	Purchase Order Procedure	12/11/2001	E
SOP4005	Purchase Requisition and Amendment	3/11/2002	C
SOP4006	Device History Records	9/25/2001	C
SOP4007	Non-Conforming Material Review Board	9/25/2001	B
SOP4008	Product Receiving, Handling, and Storage	6/15/2001	B
SOP4009	Material Identification and Acceptance Status Procedure	2/1/2002	D
SOP4010	Lot/Serial Number Control	8/22/2001	B
SOP5001	Product Monographs	2/1/2002	F
SOP5002	Manufacturing Procedure Content	5/7/2002	B
SOP5003	Preventive Maintenance System	9/20/2001	B

A-1

Document		Effective
Number	Description	Date	Rev. Level
SOP5004	Custom Tool Approval	1/18/2002	B
SOP5005	Custom Equipment Selection, Acceptance and Qualification	1/9/2002	B
SOP5006	Product Sterilization, Ethylene Oxide Procedure	1/21/2002	C
SOP5007	Process Control	10/22/2001	A
SOP5008	Statistical Techniques	4/11/2001	A
SOP5009	Controlled Environment	4/26/2002	E
SOP5010	Product Inspection Test, and Acceptance	2/26/2002	B
SOP5011	Engineering Evaluations	2/26/2002	B
SOP5012	Product Sterilization, Radiation Procedure	4/16/2002	A
SOP6001	Non-Disclosure Agreement	1/18/2002	B
SOP6002	Consulting Agreements Procedure	1/18/2002	C
SOP6003	Employee Training Program	1/21/2002	B
SOP6004	Employee Position Descriptions	2/25/2002	C
SOP6005	Employee Performance Evaluation	1/21/2002	B
SOP6006	Training Database	1/21/2002	B
SOP6007	Facility Controls	6/25/2001	A
SOP6008	Signature Authority and Delegation of Signature Authority	1/22/2002	B
SOP6009	Disaster and Evacuation Protocol	3/27/2002	B
SOP6010	Accounts Payable - Invoice Approval Process	6/25/2001	A
SOP6011	Property Identification Tracking System	10/3/2001	B
SOP6012	Chemical Ordering	Pending	—
SOP6013	Hazardous Waste Management	Pending	—
SOP6014	Hazard Communication Program (Right to Know)	Pending	—
SOP6015	Bloodborne Pathogen Procedure	Pending	—
SOP7001	Clinical Trial Overview	5/8/2002	A
SOP7002	Use	—	—
SOP7003	Writing A Clinical Protocol	2/27/2002	D
SOP7004	Writing An Investigators Brochure	2/27/2002	B
SOP7005	Site Initiation	2/27/2002	B
SOP7006	Routine Monitoring Visits	2/27/2002	B
SOP7007	Study Close-out Visits	6/6/2001	A
SOP7008	CRF Processing and Data Management	10/18/2001	B
SOP7009	Study Final report	5/8/2002	A
SOP7010	Clinical Study Files	5/8/2002
SOP7011	Product Recalls/Field Corrective Actions	9/27/2001	A
SOP7012	Management Review Procedure	8/27/2001	B
SOP7013	Medical Device Reporting	3/1/2002	B
SOP7014	Internal deviations	Pending	—

A-2

Document		Effective
Number	Description	Date	Rev. Level
SOP7015	Gage Repeatability and Reproducibility Evaluations	2/15/2002	B
SOP7016	Calibration System Procedure	3/5/2002	C
SOP7017	Adverse Event Reportind	4/9/2001	A
SOP7018	Vigilance Reporting	9/27/2001	A
SOP7019	Biohazard Material Handling	Pending	—
SOP7020	Internal Quality Audits	11/5/2001	C
SOP7021	Complaint and Return Goods Analysis	3/1/2002	B
SOP7022	Corrective and Preventive Actions (CAPA)	8/27/2001	B
SOP7023	Regulatory Inspections	3/1/2002	B
SS-001	ASD I, System Specification	9/21/2001	B
SS-002	CAPA Database, System Specification	6/25/2001	B
SS-003	Delivery System II, System Specification	12/18/2001	B
SS-004	Test Log	6/6/2001	A
SS-005	Preventive Maintenance Database, System Specification	7/31/2001	A
SS-006	Suppliers and Associated Lot Information Database (ASL)	4/22/2002	B

A-3

EX-14.1 22 c01111s1exv14w1.htm CODE OF CONDUCT AND ETHICS

Exhibit 14.1

RESTORE MEDICAL, INC.

CODE OF BUSINESS CONDUCT AND ETHICS FOR DIRECTORS, OFFICERS
AND EMPLOYEES

Introduction

          This Code of Business Conduct and Ethics (the “Code”) covers a wide range of business practices and procedures for Restore Medical, Inc. (“Restore Medical,” “we,” “us,” or “our”). This Code does not cover every issue that may arise, but it sets out basic principles to guide all of our employees, officers and directors.

          All of our employees, officers and directors are expected to read and become familiar with the ethical standards described in this Code, must conduct themselves accordingly and seek to avoid even the appearance of improper behavior.

          The Code also should be provided to and followed by our agents and representatives, including consultants.

          Our Board of Directors is responsible for setting the standards of business conduct contained in this Code and updating these standards as it deems appropriate to reflect changes in the legal and regulatory framework that applies to our business, the business practices within our industry, and the prevailing ethical standards of the communities in which we operate. While our Chief Financial Officer (or other officer designated from time to time by the Board of Directors) will oversee the procedures designed to implement this Code to ensure that they are operating effectively, it is the individual responsibility of each of our directors, officers and employees to comply with this Code.

          If a law conflicts with a policy in this Code, you must comply with the law; however, if a local custom or policy conflicts with this Code, you must comply with the Code. Questions should be referred to the employee’s supervisor or to our Chief Financial Officer.

          Those individuals who violate the standards in this Code, or who make false attestations as to their compliance with this Code, will be subject to appropriate disciplinary action, which may include demotion or termination of employment. If you are in a situation that you believe may violate or lead to a violation of this Code, follow the guidelines described in Sections 14 and 15 of this Code.

     1. Compliance with Laws, Rules and Regulations

          Obeying the law, both in letter and in spirit, is the foundation on which our ethical standards are built. All employees, officers and directors must respect and obey the laws of the cities, states and countries in which we operate. Although not all employees, officers and directors are expected to know the details of these laws, it is important to know enough to determine when to seek advice from supervisors, managers or other appropriate personnel.

     2. Conflicts of Interest

          Conflicts of interest are prohibited as a matter of Restore Medical policy, except under guidelines approved by our Board of Directors. A “conflict of interest” exists when a person’s private interests interfere in any way with the interests of Restore Medical. A conflict situation can arise when an employee, officer or director takes actions or has interests that may make it difficult to perform his or her work for Restore Medical objectively and effectively.

          Conflicts of interest may also arise when an employee, officer or director, or members of his or her family, receives improper personal benefits as a result of his or her position within Restore Medical. Loans to, or guarantees of obligations of, employees and/or their family members may create conflicts of interest and are expressly prohibited, with the exception of pre-approved loans from Restore Medical to employees for moving and relocation, or except as otherwise expressly approved, in writing, by the appropriate officers and/or directors of Restore Medical in accordance with our written policies.

          The best policy is to avoid any direct or indirect business connection with our customers, suppliers or competitors, except on behalf of Restore Medical. In particular, without the specific permission of our Chief Financial Officer, no director, officer or employee shall

• be a consultant to, or a director, officer or employee of, or otherwise operate or have a significant financial interest in an outside business that markets products or services in competition with our current or potential products and services or supplies or purchase products or services to or from us.

• seek or accept any personal loan or services from any entity with which we do business, except from financial institutions or service providers offering similar loans or services to third parties under similar terms in the ordinary course of their respective businesses; or

• be a consultant to, or a director, officer or employee of, or otherwise operate an outside business if the demands of the outside business would interfere

with the director’s, officer’s or employee’s responsibilities to us (if in doubt, consult your supervisor or our Chief Financial Officer).

          Directors and employees must notify and inform our Chief Financial Officer prior to accepting an appointment to the board of directors or the advisory board of any public or privately held company. The disclosure requirements and other possible conflict of interest issues involved will be analyzed and discussed at the time of any such notification.

          Conflicts of interest may not always be clear-cut, so if an employee has a question, he or she should consult with his or her supervisor or our Chief Financial Officer. Any employee, officer or director who becomes aware of an actual or apparent conflict or potential conflict should bring it to the attention of a supervisor, manager or other appropriate personnel or consult the procedures described in Section 15 of this Code.

     3. Insider Trading

          Employees, officers and directors who have access to confidential information about Restore Medical, its business relationships and operations are not permitted to use or share that information for stock trading purposes or for any other purpose except the conduct of our business. All non-public information about Restore Medical, its business relationships and operations should be considered confidential information. To use non-public information for personal financial benefit or to “tip” others who might make an investment decision on the basis of this information is not only unethical but also illegal. In order to assist us in our efforts to ensure compliance with laws against insider trading, we have adopted a specific policy governing employee’s trading in securities of Restore Medical. This policy will be made available to every employee. If you have any questions, please consult our Chief Financial Officer.

     4. Corporate Opportunities

          Our employees, officers and directors are prohibited from personally taking advantage of opportunities that are discovered through the use of corporate property, information or position without the consent of our Board of Directors. No employee or director may use corporate property, information, or position for improper personal gain, and no employee may compete with Restore Medical directly or indirectly. Employees, officers and directors owe a duty to Restore Medical to advance its legitimate interests when the opportunity to do so arises.

     5. Competition and Fair Dealing

          We seek to outperform our competition fairly and honestly. We seek competitive advantages through superior performance, never through unethical or illegal business

practices. Stealing proprietary information, possessing trade secret information that was obtained without the owner’s consent, or inducing such disclosures by past or present employees of other companies is prohibited. Each of our employees should endeavor to respect the rights of and deal fairly with our customers, suppliers, competitors and employees. None of our employees should take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other intentional unfair-dealing practice.

          To build and maintain our valuable reputation, compliance with our quality processes and safety requirements is essential. In the context of ethics, quality requires that our products and services be designed and manufactured to meet our obligations to customers. All inspection and testing documents must be handled in accordance with all applicable regulations.

          The purpose of business entertainment and gifts in a commercial setting is to create goodwill and sound working relationships, not to gain unfair advantage with customers. No gift or entertainment should ever be offered, given, provided or accepted by any of our employees, directors, agents, or family members thereof, unless it: (1) is not a cash gift; (2) is consistent with customary business practices; (3) cannot be construed as a bribe or payoff, and (4) does not violate any laws or regulations. Business gifts given or received should be of nominal value. Employees should discuss with their supervisors or our Chief Financial Officer any gifts or proposed gifts that they are not certain are appropriate.

     6. Discrimination and Harassment

          The diversity of our employees, officers and directors is a tremendous asset and resource. We are firmly committed to providing equal opportunity in all aspects of employment and will not tolerate any illegal discrimination or harassment of any kind. Examples include derogatory comments based on racial or ethnic characteristics, sexual preference, religious beliefs, and unwelcome sexual advances.

     7. Health and Safety

          We strive to provide each of our employees with a safe and healthy work environment and to conduct our activities in full compliance with all applicable environmental laws. Each of our employees has responsibility for maintaining a safe and healthy workplace for all employees by following safety and health rules and practices and reporting accidents, injuries and unsafe equipment, practices or conditions.

          Violence and threatening behavior are not permitted. Employees should report to work in condition to perform their duties, free from the influence of illegal drugs or alcohol. The use of illegal drugs in the workplace will not be tolerated.

     8. Record-Keeping

          We require honest and accurate recording and reporting of information in order to make responsible business decisions. For example, only the true and actual number of hours worked should be reported.

          Many employees regularly use business expense accounts, which must be documented and recorded accurately. If you are not sure whether a certain expense is legitimate, ask your supervisor or our Chief Financial Officer. All of our books, records, accounts and financial statements must be maintained in reasonable detail, must appropriately reflect Restore Medical’s transactions and must conform both to applicable legal requirements and to our system of internal controls. Unrecorded or “off the books” funds, assets or obligations are prohibited and should not be maintained.

          Business records and communications often become public, and we should avoid exaggeration, derogatory remarks, guesswork, or inappropriate characterizations of people and companies that can be misunderstood. This policy applies equally to e-mail, internal memos, and formal reports. Records should always be retained or destroyed according to our record retention policies. In accordance with those policies, in the event of litigation or governmental investigation please consult our Chief Financial Officer.

     9. Confidentiality

          Employees, officers and directors must not disclose confidential information entrusted to them by us or our customers, except when disclosure is authorized by our legal counsel, or as may otherwise be required by applicable laws or regulations. Confidential information includes all non-public information that might be of use to competitors, or harmful to us or our customers, if disclosed. Confidential information also includes information that suppliers and customers have entrusted to us.

          Maintaining confidentially includes ensuring that access to work areas and computers is properly controlled, and refraining from discussions of sensitive matters in public places, such as elevators, hallways, restaurants, restrooms, etc. Not disclosing confidential information means not communicating the information by any means including, without limitation, orally, in writing, or electronically (e.g., in person or via telephone, mail, fax, email, Internet “chat rooms,” posting to community bulletin boards, or otherwise). In addition to the foregoing, you are also prohibited from using any proprietary or confidential information for any unauthorized purpose, including for your own personal gain. The obligation to preserve confidential information continues even after employment or directorship terminates.

     10. Protection and Proper Use of Restore Medical Assets

          All employees, officers and directors should endeavor to protect our assets and ensure their efficient use. Theft, carelessness, and waste have a direct impact on our profitability. Any suspected incident of fraud or theft should be immediately reported for investigation. Restore Medical equipment should not be used for non-company business, though incidental personal use may be permitted.

          The obligation of our employees, officers and directors to protect our assets includes our proprietary information. Proprietary information includes intellectual property such as trade secrets, patents, trademarks and copyrights, as well as business, marketing and service plans, engineering and manufacturing ideas, designs, databases, records, salary information and any unpublished financial data and reports. Unauthorized use or distribution of this information would violate Restore Medical policy, and it also could be illegal and result in civil or criminal penalties.

     11. Payments to Government Personnel

          The U.S. Foreign Corrupt Practices Act (“FCPA”) prohibits giving anything of value, directly or indirectly, to officials of foreign governments or foreign political candidates in order to obtain or retain business. Making illegal payments to government officials of any country is strictly prohibited. In addition, the U.S. government has a number of laws and regulations regarding business gratuities that may be accepted by U.S. government personnel. The promise, offer or delivery to an official or employee of the U.S. government of a gift, favor or other gratuity in violation of these rules would not only violate Restore Medical policy but could also be a criminal offense. State and local governments, as well as foreign governments, may have similar rules. Questions and/or requests for interpretations should be reviewed and all actions pre-approved by our legal counsel responsible for FCPA compliance.

     12. Anti-Boycott Laws

          U.S. law prohibits U.S. persons from taking actions or entering into agreements that have the effect of furthering any unsanctioned boycott of a country that is friendly to the United States. This prohibition applies to persons located in the United States (including individuals and companies), U.S. citizens and permanent residents anywhere in the world, and most activities of U.S. subsidiaries abroad. In general, these laws prohibit the following actions (and agreements to take such actions) that could further any boycott not approved by the United States: (1) refusing to do business with other persons or companies (because of their nationality, for example); (2) discriminating in employment practices; (3) furnishing information on the race, religion, gender, or national origin of any U.S. person; (4) furnishing information about any person’s affiliations or business relationships with a boycotted country or with any person believed

to be blacklisted by a boycotting country; or (5) utilizing letters of credit that contain prohibited boycott provisions.

          We are required to report any request to take action, or any attempt to reach agreement on such action, that would violate these prohibitions. Each employee should understand the policies of their business unit that are designed to ensure compliance with these laws. All employees should also be alert to the fact that boycott-related requests can be subtle and indirect. Questions and/or requests for interpretations should be reviewed and all actions pre-approved by our legal counsel responsible for anti-boycott compliance.

     13. U.S. Embargoes and Sanctions

          We engage in a significant amount of international trade. We comply fully with U.S. economic sanctions and embargoes restricting U.S. persons, corporations and, in some cases, foreign subsidiaries, from doing business with certain countries, groups and individuals, including organizations associated with terrorist activity and narcotics trafficking. Economic sanctions may prohibit doing business of any kind with targeted governments and organizations, as well as individuals and entities that act on their behalf. U.S. economic sanctions also may restrict investments in certain targeted countries, as well as trading in goods, technology, and services with a targeted country. U.S. persons may not approve or facilitate transactions by a third party that the U.S. person could not do directly. Questions and/or requests for interpretations should be reviewed and all actions pre-approved by our legal counsel responsible for compliance with U.S. economic sanctions.

     14. Reporting Fraud or any other Illegal or Unethical Behavior

          All employees are responsible for reporting fraud, falsification of records or reports, misappropriation of funds or other assets of Restore Medical and other irregularities. Managers should become familiar with the types of irregularities that might occur in their area of responsibility and must establish standards and procedures designed to prevent and detect irregularities. Fraud applies to any irregularity or suspected irregularity related to our business and involving employees, vendors, or persons that provide service or materials.

          Employees, officers and directors are encouraged to talk to supervisors, managers or other appropriate personnel about observed fraudulent, illegal or unethical behavior and, when in doubt, about the best course of action in a particular situation. If you suspect fraud, do not discuss the matter with any of the individuals involved and do not attempt to investigate or determine facts on your own. To report fraudulent, illegal or unethical behavior, or if you have a question regarding the appropriate course of action, follow the guidelines described in Section 15 of this Code. It is our policy not to allow retaliation for reports of misconduct by others made in good faith by employees. Employees are expected to cooperate in internal investigations of misconduct. Our Chief

Financial Officer will investigate any reported violations and will oversee an appropriate response, including corrective action and preventative measures.

          Employees must read our Employee Complaint Procedures for Accounting and Auditing Matters below, which describes our procedures for the receipt, retention, and treatment of complaints that we receive regarding accounting, internal accounting controls, or auditing matters. Any employee may submit a good faith concern regarding questionable accounting or auditing matters without fear of dismissal or retaliation of any kind.

     15. Compliance Procedures

          We must all work to ensure prompt and consistent action against violations of this Code. However, in some situations it is difficult to know if a violation has occurred. Since we cannot anticipate every situation that will arise, it is important that we have a way to approach a new question or problem. All employees should keep the following steps keep in mind when evaluating a possible violation of the Code:

• Make sure you have all the facts. In order to reach the right solutions, we must be as fully informed as possible.

• Ask yourself: What specifically am I being asked to do? Does it seem unethical or improper? This question will enable you to focus on the specific situation you are faced with, and the alternatives you may have. Use your judgment and common sense; if something seems unethical or improper, it probably is.

• Clarify your responsibility and role. In most situations, there is shared responsibility. Are your colleagues informed? If so, it may help to get others involved and discuss the problem.

• Discuss the problem with your supervisor. This recommendation is basic guidance for all situations. In many cases, your supervisor will be more knowledgeable about the question, and will appreciate being brought into the decision-making process. Remember that it is your supervisor’s responsibility to help solve problems.

• Seek help from Restore Medical resources. In the rare case where it may not be appropriate to discuss an issue with your supervisor, or in situations where you do not feel comfortable approaching your supervisor with your question, please discuss the issue with our Chief Financial Officer.

          You may report the ethical violations in confidence and without fear of retaliation. If your situation requires that your identity be kept secret, we will take steps to ensure your anonymity will be protected. We do not permit retaliation of any kind against employees for good faith reports of ethical violations.

     16. Code of Ethics for Senior Financial Officers

          Our Chief Executive Officer and Chief Financial Officer and the other senior financial officers performing similar functions who have been identified by our Chief Executive Officer (collectively, the “Senior Financial Officers”) are responsible for full, fair, accurate, timely and understandable disclosure in the periodic reports that we are required to file with the Securities and Exchange Commission (“SEC”). In addition to being bound by all other provisions of our Code of Business Conduct and Ethics, our Chief Executive Officer and all Senior Financial Officers are subject to the following specific provisions:

• Each Senior Financial Officer shall act with honesty and integrity in the performance of his or her duties at Restore Medical, shall comply with laws, rules and regulations of federal, state and local governments and other private and public regulatory agencies that affect the conduct of our business and our financial reporting.

• Each Senior Financial Officer is prohibited from directly or indirectly taking any action to interfere with, fraudulently influence, coerce, manipulate or mislead our independent public auditors in the course of any audit of our financial statements or accounting books and records.

• Each Senior Financial Officer shall promptly bring to the attention of the internal management disclosure team any material information of which he or she may become aware that could affect the disclosures made by us in our public filings or otherwise assist management in fulfilling its responsibilities.

• Each Senior Financial Officer shall promptly bring to the attention of our internal management disclosure team and the Audit Committee of our Board of Directors any information he or she may have concerning (a) significant deficiencies in the design or operation of internal controls which could adversely affect our ability to record, process, summarize and report financial data, or (b) any fraud, whether or not material, that involves management or other employees who have a significant role in our financial reporting, disclosures or internal controls.

• Each Senior Financial Officer shall promptly bring to the attention of the Audit Committee of our Board of Directors any information he or she may

	have concerning any violation of this Code by any employee who has a significant role in our financial reporting, disclosures or internal controls.
•	Each Senior Financial Officer shall promptly bring to the attention of our Chief Financial Officer and the Audit Committee of our Board of Directors any information he or she may have concerning evidence of a material violation of the securities or other laws, rules or regulations that apply to us and the operation of our business, by us or any of our agents, or of violation of this Code or of these additional procedures.
•	Each Senior Financial Officer shall promptly bring to the attention of our Chief Financial Officer and the Audit Committee of our Board of Directors, any material transaction or relationship that arises and of which he or she becomes aware that reasonably could be expected to give rise to an actual or apparent conflict of interest.

          Our Board of Directors shall determine, or designate appropriate persons to determine, appropriate actions to be taken in the event of violations of this Code by our Senior Financial Officers. Such actions shall be reasonably designed to deter wrongdoing and to promote accountability for adherence to this Code, and may include written notices to the individual involved that our Board has determined that there has been a violation, censure by our Board, demotion or re-assignment of the individual involved, suspension with or without pay or benefits and termination of the individual’s employment.

     17. Employee Complaint Procedures for Accounting and Auditing Matters

          Any of our employees may submit a good faith complaint regarding accounting or auditing matters to our management without fear of dismissal or retaliation of any kind. We are committed to achieving compliance with all applicable securities laws and regulations, accounting standards, accounting controls and audit practices. The Audit Committee of our Board of Directors will oversee treatment of employee concerns in this area.

          In order to facilitate the reporting of employee complaints, the Audit Committee of our Board of Directors has established the following procedures for (1) the receipt, retention and treatment of complaints regarding accounting, internal accounting controls, or auditing matters, and (2) the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters (collectively, “Accounting Matters”).

Receipt of Employee Complaints

• Employees with concerns regarding Accounting Matters may report their concerns to our Chief Financial Officer.

• Employees may forward complaints on a confidential or anonymous basis to the Chairman of our Audit Committee of our Board of Directors via e-mail at the following address: auditchair@restoremedical.com

Scope of Matters Covered by these Procedures

          These procedures relate to employee complaints relating to any Accounting Matters, including, without limitation, the following:

• fraud or deliberate error in the preparation, evaluation, review or audit of any of our financial statements;

• fraud or deliberate error in the recording and maintaining of any of our financial records;

• deficiencies in or noncompliance with the our internal accounting controls;

• misrepresentation or false statement to or by a senior officer or accountant with respect to a matter contained in our financial records, financial statements or audit reports; or

• deviation from full and fair reporting of our financial condition.         .

Treatment of Complaints

• Upon receipt of a complaint, our Chief Financial Officer or the Chairman of our Audit Committee, as appropriate, will (1) determine whether the complaint actually pertains to Accounting Matters, and (2) when possible, acknowledge receipt of the complaint to the sender.

• Complaints relating to Accounting Matters will be reviewed under Audit Committee direction and oversight by our Chief Financial Officer or another senior officer designated by our Audit Committee (or such other persons as our Audit Committee determines to be appropriate). Confidentiality will be maintained to the fullest extent possible, consistent with the need to conduct an adequate review.

• Prompt and appropriate corrective action will be taken when and as warranted in the judgment of our Audit Committee.

• We will not discharge, demote, suspend, threaten, harass or in any manner discriminate against any employee in the terms and conditions of his or her employment based upon any lawful actions of such employee with respect to good faith reporting of complaints regarding Accounting Matters or otherwise as specified in Section 806 of the Sarbanes-Oxley Act of 2002.

Reporting and Retention of Complaints and Investigations.

          Our Chief Financial Officer will maintain a log of all complaints, tracking their receipt, investigation and resolution and shall prepare a periodic summary report thereof for our Audit Committee. Copies of complaints and such log will be maintained as directed by our Audit Committee.

     18. Waivers of the Code

          Every effort will be made to resolve potential conflicts of interest or potential violations of this Code when these situations are disclosed promptly to management and the parties involved have acted in good faith. In the unlikely event potential conflicts of this Code cannot be resolved, waivers will only be given for matters where it is absolutely appropriate under the circumstances and granting of such a waiver will not present a material financial or reputational risk to Restore Medical. Any waiver for executive officers and directors must be approved, in advance, by our full Board of Directors and will be promptly disclosed to our stockholders, along with the reasons for the waiver, as required by applicable law or stock exchange regulation.

EX-23.1 23 c01111s1exv23w1.htm CONSENT OF KPMG LLP

Exhibit 23.1

When the common stock reverse split referred to in Note 17 of the Notes to Financial Statements has been consummated, we will be in a position to render the following consent:

/s/ KPMG LLP

Consent of Independent Registered Public Accounting Firm

The Board of Directors
Restore Medical, Inc.:

We consent to the use of our report dated March 6, 2006, except as to Note 17 which is as of _______________, with respect to the balance sheets of Restore Medical, Inc. as of December 31, 2004 and 2005, and the related statements of operations, shareholders’ deficit, and cash flows for each of the years in the three-year period ended December 31, 2005, included herein, and to the reference of our firm under the headings “Selected Financial Data” and “Experts” in the prospectus.

Our report contains explanatory paragraphs stating that the financial statements as of December 31, 2003 and as of and for the year ended December 31, 2004 have been restated and that the Company changed its method of accounting for preferred stock warrants subject to redemption upon the adoption of Statement of Financial Accounting Standard No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity on July 1, 2003.

Minneapolis, Minnesota

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EX-10.5

Exhibit 10.5

SEPARATION AGREEMENT

     This Separation Agreement and Mutual Release (“Agreement”) is made and entered into by and between Restore Medical Inc. (“RMI”), a Delaware corporation located at 2800 Patton Road, St. Paul, Minnesota 55113 and Susan L. Critzer (“Critzer”) who resides at 9 Spyglass, Dellwood, Minnesota 55110.

WITNESSETH:

     WHEREAS, Critzer is the President and Chief Executive Officer of RMI;

     WHEREAS, RMI and Critzer have mutually agreed to the terms related to the termination of Critzer’s employment with RMI effective as of December 31, 2004, or upon an alternative mutually agreed upon date following RMI’s hiring of a new President and Chief Executive Officer, whichever is later;

     WHEREAS, this Agreement is intended to replace and supercede that certain Change in Control and Severance Agreement dated March 30, 2004, by and between RMI and Critzer;

     NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth in this Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged,

     IT IS AGREED, by and between the undersigned, as follows:

     1. Separation from Employment. Effective as of December 31, 2004, or upon an alternative mutually agreed upon date following RMI’s hiring of a new President and Chief Executive Officer, whichever is later (the “Separation Date”), Critzer’s employment with RMI will terminate. Following the Separation Date, all Critzer’s benefits and privileges of employment will end except as provided in Paragraph 3 of this Agreement. Critzer and RMI further agree that the Change in Control and Severance Agreement dated March 30, 2004, by and between RMI and Critzer is terminated and superceded by this Agreement and is null and void.

     2. Critzer’s Transition Assistance Duties Prior to the Separation Date. Prior to the Separation Date, Critzer will continue to perform her duties as President and CEO of RMI and, upon the hiring of a new President and Chief Executive Officer, her duties shall be to assist in the new President and CEO’s orientation, to facilitate a smooth transition, and to perform any and all other duties as she may be directed to do from time to time by RMI’s Board of Directors.

     Prior to the Separation Date, RMI shall continue to pay Critzer her current Base Salary (annualized at $315,000/year as of the date of this Agreement) in periodic installments in accordance with the standard payroll practices of RMI in effect from time to time, and Critzer shall continue to be entitled to all benefits currently provided to her as a full-time employee of RMI up through the Separation Date.

     3. Payments and Benefits to Critzer. Provided this Agreement is executed and Critzer has not revoked and/or rescinded it in accordance with Paragraph 7, RMI will provide the following payments and benefits to Critzer:

(a)	Following the Separation Date, RMI shall pay Critzer $315,000 subject to usual payroll withholding, to be paid in approximately equal periodic installments over twelve months in accordance with the standard payroll practices of RMI in effect from time to time, commencing with the first payment on January 15, 2005, and the last payment on December 31, 2005) or upon an alternative mutually agreed upon schedule. In addition, Critzer shall participate in any bonus plan offered to other executives or managers of RMI during her employment. A bonus to be paid to her under said plan shall be pro rated for the period of her employment and shall be paid within 30 days after her employment ends.
(b)	Effective as of the Separation Date, RMI agrees to provide Critzer and her current family members with continued group health coverage, including medical and dental coverage, as otherwise required under applicable stated continuation law and the Consolidated Omnibus Budget Reconciliation Act of 1986, 29 U.S.C. §§ 1161-1168; 26 U.S.C. § 4980B(f), as amended, and all applicable regulations (referred to collectively as “COBRA”). RMI will pay the total applicable premium cost for such medical and dental COBRA continuation coverage for Critzer and her family for a period of up to 12 months commencing on the Separation Date provided, however, that RMI’s obligation to pay for such premiums shall terminate if (i) Critzer or her husband becomes covered under another company’s like benefit plan; (ii) Critzer is eligible (whether or not covered) under Medicare; or (iii) Critzer dies. After expiration of the 12 month period in which RMI pays the above-described premiums, if necessary, Critzer will be responsible for payment of such premiums for as long a period as is allowable under applicable law (for purposes of calculating the total continuation coverage period under COBRA such coverage period shall commence as of the Separation Date).
(c)	Effective as of the Separation Date, RMI agrees to continue to pay Critzer’s group term life insurance premiums for a period of twelve months with the payment of such premiums and such coverage terminating on December 31, 2005, or upon an alternative mutually agreed upon date;
(d)	Pursuant to the terms and conditions set forth in Critzer’s applicable stock option agreements with RMI, RMI agrees that, notwithstanding anything to the contrary set forth in such stock option agreements or RMI’s 1999 Omnibus Stock Plan, as amended, during the five-year period following the Separation Date, Critzer shall be permitted to exercise 100% of all stock options granted to Critzer prior to March 30, 2004 (i.e., 150,000 shares of RMI common stock) and 50% of all options granted on or after

2

March 30, 2004 (i.e., 126,000 shares of RMI common stock). The parties hereto agree and acknowledge that, with respect to any stock options previously granted to Critzer that were intended by the parties to be treated as “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, such stock options, to the extent they may be exercised by Critzer more than 90 days following the Separation Date shall be treated as non-qualified stock options, notwithstanding any provision in Critzer’s stock option agreements to the contrary.

     4. Continuing Obligations Under Nondisclosure and Noncompetition Agreement. Critzer acknowledges and agrees that in the course of her employment with RMI, she has had access to confidential information and trade secrets relating to the business affairs of RMI and/or related companies and entities. Critzer agrees that all terms of the Nondisclosure and Noncompetition Agreement between RMI and her attached hereto as Exhibit A shall continue in full force and effect in accordance with its terms and shall not be limited, superceded or in another way affected by this Agreement.

     5. Return of Proprietary Company Property and Other Company Property. Critzer agrees that all property in her possession belonging to RMI, including without limitation, all documents, reports, manuals, memoranda, computer print-outs, customer lists, credit cards, keys, identification, products, access cards, and all other property relating in any way to the business of RMI are the exclusive property of RMI, even if Critzer authored, created or assisted in authoring or creating such property. Critzer agrees that he shall return to RMI all such documents and property prior to the Separation Date in order to be eligible to receive the benefits described in Paragraph 3 of this Agreement. Notwithstanding the foregoing, Critzer shall be permitted to keep her cellular phone, phone number, and phone account. Such cell phone account shall be transferred to Critzer personally on or about the Separation Date. Critzer agrees to accept such transfer or RMI may cancel such cell phone account. Following such transfer, Critzer shall be responsible for all cell phone charges.

     6. Acceptance Period. The terms of this Agreement will be open for acceptance by Critzer for a period of 21 calendar days (“the Acceptance Period”) during which time she may consider whether or not to accept this Agreement and seek counsel to advise her regarding this Agreement. Critzer agrees that any changes to this Agreement, material or immaterial during the Acceptance Period, will not restart the Acceptance Period. Critzer further understands that she is not required to take the entire 21-day period to decide whether she wishes to execute this Agreement and that she may do so on an accelerated basis without prejudice to her own or RMI’s rights under this Agreement.

     7. Right to Revoke and Rescind. Critzer has the right to revoke or rescind this Agreement within 15 calendar days following her signing of it.

     Any revocation or rescission of this Agreement must be in writing and hand-delivered to RMI, or, if sent by mail, postmarked within the applicable time period and sent by certified mail, return receipt requested. Any revocation or rescission must be delivered or sent to the following

3

address: Mark Knudson, Executive Chairman, Board of Directors, Restore Medical Inc., 2800 Patton Road, St. Paul, Minnesota, 55113.

     In the event that Critzer revokes or rescinds (that is cancels) this Agreement, it shall be null and void and neither Critzer nor RMI shall have any rights or obligations under this Agreement.

     8. Critzer’s Release of RMI. In exchange for the payments and benefits specified in this Agreement, Critzer, for and on behalf of herself and her heirs, administrators, executors, successors and assigns, agrees to, and hereby does, release, acquit, and forever discharge RMI and its affiliates, subsidiaries, and related companies, and the former, current, and future directors, officers, members, agents, attorneys, servants, independent contractors and employees (the “Released Parties”), from any and all claims, whether direct or indirect, fixed or contingent, known or unknown, which Critzer ever had, has, or may claim to have, for, upon, or by reason of any matter, act or thing up through the date of his execution of this Agreement, including but not limited to: any cause of action Critzer could have asserted in any litigation against any of the Released Parties; any cause of action or claim relating to Critzer’s association with or employment by RMI; any cause of action relating to any statements or actions by any of the Released Parties; and/or any cause of action or claim relating to the termination of Critzer’s employment.

     This General Release specifically encompasses, but is not limited to, claims that could be brought under Title VII, 42 U.S.C. § 2000(e) et seq., as amended by the Civil Rights Act of 1991; the Age Discrimination in Employment Act (including the Older Workers Benefit Protection Act), 29 U.S.C. § 621 et seq.; the Americans With Disabilities Act, 42 U.S.C. §§ 12101-12213; the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1001, et seq.; the Fair Labor Standards Act, 29 U.S.C. § 201, et seq.; the National Labor Relations Act, 29 U.S.C. § 151, et seq., the Worker Adjustment Retraining and Notification Act, 29 U.S.C. § 2101, et seq., the Family Medical Leave Act, 29 U.S.C. § 2601 et seq., the Minnesota Human Rights Act, Minn. Stat. § 363.01, et seq., Minn. Stat. § 181.01 et seq., Minn. Stat. § 176.82, any other statutes providing rights and protections of any kind for employees working in the state of Minnesota, and any other federal or state statute, or local ordinance, including any claims for attorneys’ fees, liquidated damages, punitive damages, costs or disbursements that could be awarded in connection with these or any other statutory claims.

     This General Release also specifically encompasses any and all claims grounded in contract or tort theories, including, but not limited to: breach of contract; tortious interference with contractual relations; promissory estoppel; breach of the implied covenant of good faith and fair dealing; breach of employee handbooks, manuals or other policies; wrongful discharge; wrongful discharge in violation of public policy; assault; battery; fraud; false imprisonment; invasion of privacy; intentional or negligent misrepresentation; defamation, including libel and slander, discharge defamation and self-defamation; intentional or negligent infliction of emotional distress; negligence; breach of fiduciary duty; negligent hiring, retention or supervision; whistleblower claims; and/or any other contract or tort theory based on either intentional or negligent conduct of any kind, including any attorneys’ fees, liquidated damages, punitive damages, costs or disbursements that could be awarded in connection with these or any other common law claims.

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     Critzer understands and agrees that she is not releasing or waiving her right to receive any vested benefits to which she is entitled under RMI’s 401(k) plan. Her rights to receive benefits under RMI’s 401(k) plan, if any, shall be governed by the terms of the plan, and nothing in this Agreement is intended to alter the terms of that plan.

     Notwithstanding the foregoing, Critzer does not release any statutory or other rights she may have to be indemnified for or to be defended against any claims that may be brought against her as a result of acts she allegedly undertook or failed to undertake during her employment with RMI.

     9. RMI’s Release of Critzer. RMI and its affiliates, subsidiaries, and related companies, and their former, current, and future owners, shareholders, directors, officers, members, agents, insurers, assigns, representatives, attorneys, servants, independent contractors and employees hereby does release, acquit, and forever discharge Critzer and her attorneys, agents, personal representatives, heirs, and assigns (“the Released Critzer Parties”), of and from any and all actions, causes of action, liabilities, suits, debts, sums of money, accounts, bonds, bills, covenants, contracts, controversies, agreements, guaranties, promises, damages, judgments, claims and demands whatsoever, in law or in equity, whether direct or indirect, fixed or contingent, known or unknown, asserted or unasserted, suspected or unsuspected, which RMI may now have or hereafter have or claim to have against the Released Critzer Parties arising up through the date of her signature on this Agreement.

     10. Confidentiality. Critzer agrees to keep the terms of this Agreement confidential. Critzer agrees not to disclose any information concerning this Agreement to any person, including any present or former employees of RMI. These confidentiality provisions are subject to the following exceptions: Critzer may disclose this Agreement to her attorneys, accountants, tax advisors or spouse or in the course of legal proceedings involving RMI, or in response to a court order, subpoena or inquiry by a government agency. RMI agrees to keep this Agreement confidential except that it may disclose the contents of this Agreement to those with a business need to know and as required by law.

     11. No Admission. This Agreement is not an admission by RMI that it has acted wrongfully toward Critzer or anyone else, and shall not be interpreted as such.

     12. No Assignment. This Agreement is personal to Critzer and may not be assigned by her. The payments to be provided to Critzer as set forth in Paragraph 3 of this Agreement shall be made to Critzer’s estate in the event of Critzer’s death prior to Critzer’s receipt of such payments.

     13. Governing Law; Severability. This Agreement shall be governed by the laws of the State of Minnesota. If any part of this Agreement is construed to be in violation of any law, such part shall be modified to achieve the objective of the parties to the fullest extent permitted and the balance of this Agreement shall remain in full force and effect.

     14. Entire Agreement. Critzer agrees that this Agreement, and all agreements referenced in this Agreement (i.e., the “Nondisclosure and Noncompetition Agreement”) except for those expressly revoked herein (i.e., the “Change in Control and Severance Agreement dated

5

March 30, 2004”), contains the entire agreement between Critzer and RMI with respect to Critzer’s employment and separation from employment and that there are no promises or understandings outside of this Agreement with respect to Critzer’s employment or Critzer’s separation from employment with RMI. Any modification of or addition to this Agreement must be in a writing signed by Critzer and RMI.

     15. Venue. Any action at law, suit in equity, or judicial proceeding arising directly, indirectly, or otherwise in connection with, out of, related to or from this Agreement or any provision hereof, shall be litigated only in the federal or state courts of the State of Minnesota, and Critzer waives any right she may have to transfer or change the venue of any litigation brought against Critzer by RMI.

     16. Waivers. No failure on the part of either party to exercise, and no delay in exercising, any right or remedy pursuant to this Agreement shall operate as a waiver thereof; nor shall any single or partial exercise of any right or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right or remedy granted hereby or by an related document or by law.

     17. Captions and Headings. The captions and section headings used in this Agreement are for convenience of reference only, and shall not affect the construction or interpretation of this Agreement or any of the provisions hereof.

     18. Counterparts. This Agreement may be simultaneously executed in any number of counterparts, and such counterparts executed and delivered, each as an original, shall constitute but one in the same instrument.

     19. Acknowledgement. CRITZER AFFIRMS THAT SHE HAS READ THIS AGREEMENT. CRITZER IS HEREBY ADVISED TO CONSULT WITH AN ATTORNEY PRIOR TO SIGNING THIS AGREEMENT. CRITZER AGREES THAT THE PROVISIONS OF THIS AGREEMENT ARE UNDERSTANDABLE TO HER AND THAT SHE HAS ENTERED INTO THIS AGREEMENT FREELY AND VOLUNTARILY.

Dated:          August 13, 2004	/s/ Susan L. Critzer
	Susan L. Critzer

Dated:          August 13, 2004	RESTORE MEDICAL INC.
	By /s/ Mark B. Knudson
	Its Executive Chair

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EX-10.6

Exhibit 10.6

Amendment
to
Separation Agreement dated August 13, 2004
between Restore Medical Inc. and Susan L. Critzer

     Pursuant to Paragraph 14 of the Separation Agreement between Restore Medical Inc. (“RMI”) and Susan L. Critzer (“Critzer”) dated August 13, 2004 (“Separation Agreement”), RMI and Critzer agree pursuant to this Amendment to Separation Agreement (“Amendment Agreement”) that Section 1 and Section 3(d) shall be amended as set forth below:

     1. Separation from Employment. Effective as of June 30, 2005, or upon an alternative mutually agreed upon date for the termination of Critzer’s employment from RMI, whichever is earlier; or upon the date of an involuntary termination of Critzer’s employment by RMI, if any; or upon the date of Critzer’s unilateral resignation from RMI, if any (all such alternative dates may be the “Separation Date”), Critzer’s employment with RMI will terminate. Following the Separation Date, all Critzer’s benefits and privileges of employment will end except as provided in Paragraph 3 of the Separation Agreement as amended by the Amendment Agreement. Critzer and RMI further agree that the Change in Control and Severance Agreement dated March 30, 2004, by and between RMI and Critzer is terminated and superceded by this Agreement and is null and void.

     3. Payments and Benefits to Critzer. Provided this Agreement is executed and Critzer has not revoked and/or rescinded it in accordance with Paragraph 7, RMI will provide the following payments and benefits to Critzer:

(d) Pursuant to the terms and conditions set forth in Critzer’s applicable stock option agreements with RMI, RMI agrees that, notwithstanding anything to the contrary set forth in such stock option agreements or RMI’s 1999 Omnibus Stock Plan, as amended, during the five-year period following the Separation Date, Critzer shall be permitted to exercise 100% of all stock options granted to Critzer prior to December 31, 2004, and not yet exercised (i. e., 502,000 shares of RMI common stock); provided, however, in the event Critzer unilaterally resigns from RMI prior to June 30, 2005, and prior to RMI’s hiring of a new President and Chief Executive Officer and Critzer’s completion of her transition assistance duties described in Paragraph 2 of this Agreement, during the five-year period following the Separation Date, Critzer shall be permitted to exercise 100% of all stock options granted to Critzer prior to March 30, 2004 (i.e., 150,000 shares of RMI common stock) and 50% of all options granted on or after March 30, 2004 (i.e., 176,000 shares of RMI common stock). The parties hereto agree and acknowledge that, with respect to any stock options previously granted to Critzer that were intended by the parties to be treated as “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, such stock options, to the extent they may be exercised by Critzer more than 90 days following the Separation Date shall be treated as non-qualified stock

options, notwithstanding any provision in Critzer’s stock option agreements to the contrary

Dated:          February 2, 2005	/s/ Susan L. Critzer
	Susan L. Critzer

Dated:          February 2, 2005	RESTORE MEDICAL INC.
	By /s/ Mark B. Knudson
	Its Chair Person

2

EX-10.7

Exhibit 10.7

RESTORE MEDICAL, INC.
1999 OMNIBUS STOCK PLAN

Section 1. Purpose.

     The purpose of this Plan is to promote the interests of the Company and its stockholders by aiding the Company in attracting, retaining and incentivizing employees, officers, consultants, independent contractors and non-employee directors.

Section 2. Definitions.

     As used in the Plan, the following terms shall have the meanings set forth below:

     (a) “Affiliate” shall mean (i) any entity that, directly or indirectly through one or more intermediaries, is controlled by the Company and (ii) any entity in which the Company has a significant equity interest, in each case as determined by the Committee.

     (b) “Award” shall mean any Option, Stock Appreciation Right, Restricted Stock, Restricted Stock Unit, Performance Award, Dividend Equivalent, Other Stock Grant or Other Stock-Based Award granted under the Plan.

     (c) “Award Agreement” shall mean any written agreement, contract or other instrument or document evidencing any Award granted under the Plan.

     (d) “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time, and any regulations promulgated thereunder.

     (e) “Committee” shall mean either the Board of Directors of the Company or a committee of the Board of Directors appointed by the Board of Directors to administer the Plan. The Company expects to have the Plan administered in accordance with the requirements for the award of “qualified performance-based compensation” within the meaning of Section 162(m) of the Code.

     (f) “Company” shall mean Restore Medical, Inc., a Delaware corporation, and any successor corporation.

     (g) “Dividend Equivalent” shall mean any right granted under Section 6(e) of the Plan.

     (h) “Eligible Person” shall mean any employee, officer, consultant, independent contractor or director providing services to the Company or any Affiliate whom the Committee determines to be an Eligible Person.

     (i) “Fair Market Value” shall mean, with respect to any property (including, without limitation, any Shares or other securities), the fair market value of such property determined by such methods or procedures as shall be established from time to time by the Committee. Notwithstanding the foregoing, unless otherwise determined by the Committee, the Fair Market

Value of Shares on a given date for purposes of the Plan shall not be less than (i) the closing price as reported for composite transactions, if the Shares are then listed on a national securities exchange, (ii) the last sale price, if the Shares are then quoted on the Nasdaq National Market or (iii) the average of the closing representative bid and asked prices of the Shares in all other cases, on the date as of which fair market value is being determined. If on a given date the Shares are not traded in an established securities market, the Committee shall make a good faith attempt to satisfy the requirements of this clause and in connection therewith shall take such action as it deems necessary or advisable.

     (j) “Incentive Stock Option” shall mean an option granted under Section 6(a) of the Plan that is intended to meet the requirements of Section 422 of the Code or any successor provision.

     (k) “Non-Qualified Stock Option” shall mean an option granted under Section 6(a) of the Plan that is not intended to be an Incentive Stock Option.

     (l) “Option” shall mean an Incentive Stock Option or a Non-Qualified Stock Option, and shall include Reload Options.

     (m) “Other Stock Grant” shall mean any right granted under Section 6(f) of the Plan.

     (n) “Other Stock-Based Award” shall mean any right granted under Section 6(g) of the Plan.

     (o) “Participant” shall mean an Eligible Person designated to be granted an Award under the Plan.

     (p) “Performance Award” shall mean any right granted under Section 6(d) of the Plan.

     (q) “Person” shall mean any individual, corporation, partnership, association or trust.

     (r) “Plan” shall mean the Restore Medical, Inc. 1999 Omnibus Stock Plan, as amended from time to time.

     (s) “Reload Option” shall mean any Option granted under Section 6(a)(iv) of the Plan.

     (t) “Restricted Stock” shall mean any Shares granted under Section 6(c) of the Plan.

     (u) “Restricted Stock Unit” shall mean any unit granted under Section 6(c) of the Plan evidencing the right to receive a Share (or a cash payment equal to the Fair Market Value of a Share) at some future date.

     (v) “Shares” shall mean shares of Common Stock, $0.01 par value, of the Company or such other securities or property as may become subject to Awards pursuant to an adjustment made under Section 4(c) of the Plan.

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     (w) “Stock Appreciation Right” shall mean any right granted under Section 6(b) of the Plan.

Section 3. Administration.

     (a) Power and Authority of the Committee. The Plan shall be administered by the Committee. Subject to the express provisions of the Plan and to applicable law, the Committee shall have full power and authority to: (i) designate Participants; (ii) determine the type or types of Awards to be granted to each Participant under the Plan; (iii) determine the number of Shares to be covered by (or with respect to which payments, rights or other matters are to be calculated in connection with) each Award; (iv) determine the terms and conditions of any Award or Award Agreement; (v) amend the terms and conditions of any Award or Award Agreement and accelerate the exercisability of Options or the lapse of restrictions relating to Restricted Stock, Restricted Stock Units or other Awards; (vi) determine whether, to what extent and under what circumstances Awards may be exercised in cash, Shares, other securities, other Awards or other property, or canceled, forfeited or suspended; (vii) determine whether, to what extent and under what circumstances cash, Shares, other securities, other Awards, other property and other amounts payable with respect to an Award under the Plan shall be deferred either automatically or at the election of the holder thereof or the Committee; (viii) interpret and administer the Plan and any instrument or agreement relating to, or Award made under, the Plan; (ix) establish, amend, suspend or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (x) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations and other decisions under or with respect to the Plan or any Award shall be within the sole discretion of the Committee, may be made at any time and shall be final, conclusive and binding upon any Participant, any holder or beneficiary of any Award.

     (b) Delegation. The Committee may delegate its powers and duties under the Plan to one or more officers of the Company or any Affiliate or a committee of such officers, subject to such terms, conditions and limitations as the Committee may establish in its sole discretion.

Section 4. Shares Available for Awards.

     (a) Shares Available. Subject to adjustment as provided in Section 4(c), the aggregate number of Shares that may be issued under all Awards under the Plan shall be 3,875,000. Shares to be issued under the Plan shall be newly issued. If any Shares covered by an Award or to which an Award relates are not purchased or are forfeited, or if an Award otherwise terminates without delivery of any Shares, then the number of Shares counted against the aggregate number of Shares available under the Plan with respect to such Award, to the extent of any such forfeiture or termination, shall again be available for granting Awards under the Plan. Notwithstanding the foregoing, the number of Shares available for granting Incentive Stock Options under the Plan shall not exceed 3,875,000, subject to adjustment as provided in the Plan and Section 422 or 424 of the Code or any successor provision.

     (b) Accounting for Awards. For purposes of this Section 4, if an Award entitles the holder thereof to receive or purchase Shares, the number of Shares covered by such Award or to

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which such Award relates shall be counted on the date of grant of such Award against the aggregate number of Shares available for granting Awards under the Plan.

     (c) Adjustments. In the event that the Committee shall determine that any dividend or other distribution (whether in the form of cash, Shares, other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of Shares or other securities of the Company, issuance of warrants or other rights to purchase Shares or other securities of the Company or other similar corporate transaction or event affects the Shares such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number and type of Shares (or other securities or other property) that thereafter may be made the subject of Awards, (ii) the number and type of Shares (or other securities or other property) subject to outstanding Awards and (iii) the purchase or exercise price with respect to any Award; provided, however, that the number of Shares covered by any Award or to which such Award relates shall always be a whole number.

     (d) Award Limitations Under the Plan. No Eligible Person may be granted any Award or Awards under the Plan, the value of which Awards is based solely on an increase in the value of the Shares after the date of grant of such Awards, for more than 100,000 Shares (subject to adjustment as provided for in Section 4(c)), in the aggregate in any calendar year. The foregoing annual limitation specifically includes the grant of any Awards representing “qualified performance-based compensation” within the meaning of Section 162(m) of the Code.

Section 5. Eligibility.

     Any Eligible Person of the Company or any Affiliate, shall be eligible to be designated a Participant. In determining which Eligible Persons shall receive an Award and the terms of any Award, the Committee may take into account the nature of the services rendered by the respective Eligible Persons, their present and potential contributions to the success of the Company or such other factors as the Committee, in its discretion, shall deem relevant. Notwithstanding the foregoing, an Incentive Stock Option may only be granted to full or part-time employees (which term as used herein includes, without limitation, officers and directors who are also employees), and an Incentive Stock Option shall not be granted to an employee of an Affiliate unless such Affiliate is also a “subsidiary corporation” of the Company within the meaning of Section 424(f) of the Code or any successor provision.

Section 6. Awards.

     (a) Options. The Committee is hereby authorized to grant Options to Participants with the following terms and conditions and with such additional terms and conditions not inconsistent with the provisions of the Plan as the Committee shall determine:

     (i) Exercise Price. The purchase price per Share purchasable under an Option shall be determined by the Committee; provided, however, that the purchase price of an

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Incentive Stock Option shall not be less than 100% of the Fair Market Value of a Share on the date of grant of such Option.

     (ii) Option Term. The term of each Option shall be fixed by the Committee; provided, however, that the term of an Incentive Stock Option may not extend more than ten years from the date of grant of such Incentive Stock Option.

     (iii) Time and Method of Exercise. The Committee shall determine the time or times at which an Option may be exercised in whole or in part and the method or methods by which, and the form or forms (including, without limitation, cash, Shares, other securities, other Awards or other property, or any combination thereof, having a Fair Market Value on the exercise date equal to the relevant exercise price; provided, however, Options granted to employees shall not include “cash-less” exercise provisions) in which, payment of the exercise price with respect thereto may be made or deemed to have been made.

     (iv) Reload Options. The Committee may grant Reload Options, separately or together with another Option, pursuant to which, subject to the terms and conditions established by the Committee, the Participant would be granted a new Option when the payment of the exercise price of a previously granted option is made by the delivery of Shares owned by the Participant pursuant to Section 6(a)(iii) hereof or the relevant provisions of another plan of the Company, and/or when Shares are tendered or forfeited as payment of the amount to be withheld under applicable income tax laws in connection with the exercise of an Option, which new Option would be an Option to purchase the number of Shares not exceeding the sum of (A) the number of Shares so provided as consideration upon the, exercise of the previously granted option to which such Reload Option relates and (B) the number of Shares, if any, tendered or withheld as payment of the amount to be withheld under applicable tax laws in connection with the exercise of the option to which such Reload Option relates pursuant to the relevant provisions of the plan or agreement relating to such option. Reload Options may be granted with respect to Options previously granted under the Plan or any other stock option plan of the Company, and may be granted in connection with any Option granted under the Plan or any other stock option plan of the Company at the time of such grant. Such Reload Options shall have a per share exercise price equal to the Fair Market Value as of the date of grant of the new Option. Any Reload Option shall be subject to availability of sufficient Shares for grant under the Plan. Shares surrendered as part or all of the exercise price of the Option to which it relates that have been owned by the optionee less than six months will not be counted for purposes of determining the number of Shares that may be purchased pursuant to a Reload Option.

     (v) Ten Percent Shareholder Rule. Notwithstanding any other provision in the Plan, if at the time an Option is otherwise to be granted pursuant to the Plan to a Participant who owns, directly or indirectly (within the meaning of Section 424(d) of the Code), Common Stock of the Company possessing more than 10% of the total combined voting power of all classes of stock of the Company or its parent or any subsidiary, then any Incentive Stock Option to be granted to such Participant pursuant to the Plan shall satisfy the requirements of Section 422(c)(5) of the Code, and the exercise price of such

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Option shall be not less than 110% of the Fair Market Value of the Shares covered, and such Option by its terms shall not be exercisable after the expiration of five years from the date such Option is granted.

     (b) Stock Appreciation Rights. The Committee is hereby authorized to grant Stock Appreciation Rights to Participants subject to the terms of the Plan and any applicable Award Agreement. A Stock Appreciation Right granted under the Plan shall confer on the holder thereof a right to receive upon exercise thereof the excess of (i) the Fair Market Value of one Share on the date of exercise (or, if the Committee shall so determine, at any time during a specified period before or after the date of exercise) over (ii) the grant price of the Stock Appreciation Right as specified by the Committee, which price shall not be less than 100% of the Fair Market Value of one Share on the date of grant of the Stock Appreciation Right. Subject to the terms of the Plan and any applicable Award Agreement, the grant price, term, methods of exercise, dates of exercise, methods of settlement and any other terms and conditions of any Stock Appreciation Right shall be as determined by the Committee. The Committee may impose such conditions or restrictions on the exercise of any Stock Appreciation Right as it may deem appropriate.

     (c) Restricted Stock and Restricted Stock Units. The Committee is hereby authorized to grant Restricted Stock and Restricted Stock Units to Participants with the following terms and conditions and with such additional terms and conditions not inconsistent with the provisions of the Plan as the Committee shall determine:

     (i) Restrictions. Shares of Restricted Stock and Restricted Stock Units shall be subject to such restrictions as the Committee may impose (including, without limitation, a waiver by the Participant of the right to vote or to receive any dividend or other right or property with respect thereto), which restrictions may lapse separately or in combination at such time or times, in such installments or otherwise as the Committee may deem appropriate.

     (ii) Stock Certificates. Any Restricted Stock shall be registered in the name of the Participant and shall bear an appropriate legend referring to the terms, conditions and restrictions applicable to such Restricted Stock. In the case of Restricted Stock Units, no Shares shall be issued at the time such Awards are granted.

     (iii) Forfeiture. Except as otherwise determined by the Committee, upon termination of employment (as determined under criteria established by the Committee) during the applicable restriction period, all Shares of Restricted Stock and all Restricted Stock Units at such time subject to restriction shall be forfeited and reacquired by the Company; provided, however, that the Committee may, when it finds that a waiver would be in the best interest of the Company, waive in whole or in part any or all remaining restrictions with respect to Shares of Restricted Stock or Restricted Stock Units. Upon the lapse or waiver of restrictions and the restricted period relating to Restricted Stock Units evidencing the right to receive Shares, such Shares shall be issued and delivered to the holders of the Restricted Stock Units.

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     (d) Performance Awards. The Committee is hereby authorized to grant Performance Awards to Participants subject to the terms of the Plan and any applicable Award Agreement. A Performance Award granted under the Plan (i) may be denominated or payable in cash, Shares (including, without limitation, Restricted Stock and Restricted Stock Units), other securities, other Awards or other property and (ii) shall confer on the holder thereof the right to receive payments, in whole or in part, upon the achievement of such performance goals during such performance periods as the Committee shall establish. Subject to the terms of the Plan and any applicable Award Agreement, the performance goals to be achieved during any performance period, the length of any performance period, the amount of any Performance Award granted, the amount of any payment or transfer to be made pursuant to any Performance Award and any other terms and conditions of any Performance Award shall be determined by the Committee.

     (e) Dividend Equivalents. The Committee is hereby authorized to grant Dividend Equivalents to Participants, subject to the terms of the Plan and any applicable Award Agreement, under which such Participants shall be entitled to receive payments (in cash, Shares, other securities, other Awards or other property as determined in the discretion of the Committee) equivalent to the amount of cash dividends paid by the Company to holders of Shares with respect to a number of Shares determined by the Committee.

     (f) Other Stock Grants. The Committee is hereby authorized, subject to the terms of the Plan and any applicable Award Agreement, to grant to Participants Shares without restrictions thereon as are deemed by the Committee to be consistent with the purpose of the Plan.

     (g) Other Stock-Based Awards. The Committee is hereby authorized to grant to Participants subject to the terms of the Plan and any applicable Award Agreement, such other Awards that are denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, Shares (including, without limitation, securities convertible into Shares), as are deemed by the Committee to be consistent with the purpose of the Plan. Shares or other securities delivered pursuant to a purchase right granted under this Section 6(g) shall be purchased for such consideration, which may be paid by such method or methods and in such form or forms (including, without limitation, cash, Shares, other securities, other Awards or other property or any combination thereof), as the Committee shall determine.

     (h) General.

     (i) No Cash Consideration for Awards. Awards shall be granted for no cash consideration or for such minimal cash consideration as may be required by applicable law.

     (ii) Awards May Be Granted Separately or Together. Awards may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with or in substitution for any other Award or any award granted under any plan of the Company or any Affiliate other than the Plan. Awards granted in addition to or in tandem with other Awards or in addition to or in tandem with awards granted under any such other plan of the Company or any Affiliate may be granted either at the same time as or at a different time from the grant of such other Awards or awards.

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     (iii) Forms of Payment under Awards. Subject to the terms of the Plan and of any applicable Award Agreement, payments or transfers to be made by the Company or an Affiliate upon the grant, exercise or payment of an Award may be made in such form or forms as the Committee shall determine (including, without limitation, cash, Shares, other securities, other Awards or other property or any combination thereof; provided, however, Options granted to employees shall not include “cash-less” exercise provisions), and may be made in a single payment or transfer, in installments or on a deferred basis, in each case in accordance with rules and procedures established by the Committee. Such rules and procedures may include, without limitation, provisions for the payment or crediting of reasonable interest on installment or deferred payments or the grant or crediting of Dividend Equivalents with respect to installment or deferred payments.

     (iv) Limits on Transfer of Awards. No Award (other than Other Stock Grants) and no right under any such Award shall be transferable by a Participant otherwise than by will or by the laws of descent and distribution; provided, however, that, if so determined by the Committee, a Participant may, in the manner established by the Committee, transfer Options (other than Incentive Stock Options) or designate a beneficiary or beneficiaries to exercise the rights of the Participant and receive any property distributable with respect to any Award upon the death of the Participant. Each Award or right under any Award shall be exercisable during the Participant’s lifetime only by the Participant or, if permissible under applicable law, by the Participant’s guardian or legal representative. No Award or right under any such Award may be pledged, alienated, attached or otherwise encumbered, and any purported pledge, alienation, attachment or encumbrance thereof shall be void and unenforceable against the Company or any Affiliate.

     (v) Term of Awards. The term of each Award shall be for such period as may be determined by the Committee.

     (vi) Restrictions; Securities Exchange Listing. All Shares or other securities delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such restrictions as the Committee may deem advisable under the Plan, applicable federal or state securities laws and regulatory requirements, and the Committee may cause appropriate entries to be made or legends to be affixed to reflect such restrictions. If the Shares or other securities are listed on a securities exchange, the Company shall not be required to deliver any Shares or other securities covered by an Award until such Shares or other securities have been listed on such securities exchange.

Section 7. Amendment and Termination; Adjustments.

     Except to the extent prohibited by applicable law and unless otherwise expressly provided in an Award Agreement or in the Plan:

     (a) Amendments to the Plan. The Board of Directors of the Company may amend, alter, suspend, discontinue or terminate the Plan; provided, however, that, notwithstanding any other provision of the Plan or any Award Agreement, without the approval of the shareholders of

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the Company, no such amendment, alteration, suspension, discontinuation or termination shall be made that, absent such approval:

     (i) would cause Rule 16b-3 or Section 162(m) of the Code to become unavailable with respect to the Plan;

     (ii) would violate the rules or regulations of the NASDAQ National Market, any other securities exchange or the National Association of Securities Dealers, Inc. that are applicable to the Company; or

     (iii) would cause the Company to be unable, under the Code, to grant Incentive Stock Options under the Plan.

     (b) Amendments to Awards. The Committee may waive any conditions of or rights of the Company under any outstanding Award, prospectively or retroactively. The Committee may not amend, alter, suspend, discontinue or terminate any outstanding Award, prospectively or retroactively, without the consent of the Participant or holder or beneficiary thereof, except as otherwise herein provided or in the Award Agreement.

     (c) Correction of Defects, Omissions and Inconsistencies. The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it shall deem desirable to carry the Plan into effect.

Section 8. Income Tax Withholding; Tax Bonuses.

     (a) Withholding. In order to comply with all applicable federal or state income tax laws or regulations, the Company may take such action as it deems appropriate to ensure that all applicable federal or state payroll, withholding, income or other taxes, which are the sole and absolute responsibility of a Participant are withheld or collected from such Participant. In order to assist a Participant in paying all or a portion of the federal and state taxes to be withheld or collected upon exercise or receipt of (or the lapse of restrictions relating to) an Award, the Committee, in its discretion and subject to such additional terms and conditions as it may adopt, may permit the Participant to satisfy such tax obligation by (i) electing to have the Company withhold a portion of the Shares otherwise to be delivered upon exercise or receipt of (or the lapse of restrictions relating to) such Award with a Fair Market Value equal to the amount of such taxes or (ii) delivering to the Company Shares other than Shares issuable upon exercise or receipt of (or the lapse of restrictions relating to) such Award with a Fair Market Value equal to the amount of such taxes. The election, if any, must be made on or before the date that the amount of tax to be withheld is determined.

     (b) Tax Bonuses. The Committee, in its discretion, shall have the authority, at the time of grant of any Award under this Plan or at any time thereafter, to approve cash bonuses to designated Participants to be paid upon their exercise or receipt of (or the lapse of restrictions relating to) Awards in order to provide funds to pay all or a portion of federal and state taxes due as a result of such exercise or receipt (or the lapse of such restrictions). The Committee shall have full authority in its discretion to determine the amount of any such tax bonus.

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Section 9. General Provisions.

     (a) No Rights to Awards. No Eligible Person, Participant or other Person shall have any claim to be granted any Award under the Plan, and there is no obligation for uniformity of treatment of Eligible Persons, Participants or holders or beneficiaries of Awards under the Plan. The terms and conditions of Awards need not be the same with respect to any Participant or with respect to different Participants.

     (b) Award Agreements. No Participant will have rights under an Award granted to such Participant unless and until an Award Agreement shall have been duly executed on behalf of the Company and, if requested by the Company, signed by the Participant.

     (c) No Limit on Other Compensation Arrangements. Nothing contained in the Plan shall prevent the Company or any Affiliate from adopting or continuing in effect other or additional compensation arrangements, and such arrangements may be either generally applicable or applicable only in specific cases.

     (d) No Right to Employment. The grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of the Company or any Affiliate, nor will it affect in any way the right of the Company or an Affiliate to terminate such employment at any time, with or without cause. In addition, the Company or an Affiliate may at any time dismiss a Participant from employment free from any liability or any claim under the Plan, unless otherwise expressly provided in the Plan or in any Award Agreement.

     (e) Governing Law. The validity, construction and effect of the Plan or any Award, and any rules and regulations relating to the Plan or any Award, shall be determined in accordance with the laws of the State of Minnesota.

     (f) Severability. If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Committee, materially altering the purpose or intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction or Award, and the remainder of the Plan or any such Award shall remain in full force and effect.

     (g) No Trust or Fund Created. Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate and a Participant or any other Person. To the extent that any Person acquires a right to receive payments from the Company or any Affiliate pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Company or any Affiliate.

     (h) No Fractional Shares. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award, and the Committee shall determine whether cash shall be paid in lieu of any fractional Shares or whether such fractional Shares or any rights thereto shall be canceled, terminated or otherwise eliminated.

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     (i) Headings. Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof.

     (j) Other Benefits. No compensation or benefit awarded to or realized by any Participant under the Plan shall be included for the purpose of computing such Participant’s compensation under any compensation-based retirement, disability, or similar plan of the Company unless required by law or otherwise provided by such other plan.

Section 10. Effective Date of the Plan.

     The Plan shall be effective as of the date of its approval and adoption by the Company’s shareholders. If the Company’s shareholders do not approve the Plan, the Plan shall be null and void.

Section 11. Term of the Plan.

     Awards shall only be granted under the Plan during a 10-year period beginning on the effective date of the Plan. However, unless otherwise expressly provided in the Plan or in an applicable Award Agreement, any Award theretofore granted may extend beyond the end of such 10-year period, and the authority of the Committee provided for hereunder with respect to the Plan and any Awards, and the authority of the Board of Directors of the Company to amend the Plan, shall extend beyond the termination of the Plan.

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EX-10.8

Exhibit 10.8

Restore Medical, Inc.
INCENTIVE STOCK OPTION AGREEMENT
Grant ID 0000000000XXX

     THIS AGREEMENT, made as of                                          , by and between Restore Medical, Inc., a Delaware corporation (the “Company”), and                     (“Optionee”).

     WHEREAS, the Company, pursuant to the 1999 Omnibus Stock Plan (the “Plan”), wishes to grant this stock option to Optionee;

     NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained, the parties hereto hereby agree as follows:

     1. Grant of Option. The Company hereby grants to Optionee the right and option (the “Option”) to purchase all or any part of an aggregate of XXXX shares (the “Shares”) of the common stock, par value $.01 per share (the “Common Stock”), of the Company at the price of  $XX.XX  per Share on the terms and conditions set forth herein. It is understood and agreed that such price is not less than 100% of the fair market value of each such Share on the date of this Agreement. The Option is intended to be entitled to treatment as an incentive stock option within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended (the “Code”).

     2. Duration and Exercisability. The Option may not be exercised by Optionee except as set forth below, and the Option shall in all events terminate ten years from the date hereof. Subject to the other terms and conditions set forth herein, the Option shall vest and may be exercised by Optionee in cumulative installments as follows:

     Vesting Schedule:

XXXX on XX/XX/XXXX
XXXX on XX/XX/XXXX
XXXX on XX/XX/XXXX
XXXX on XX/XX/XXXX
XXXX on XX/XX/XXXX
XXXX on XX/XX/XXXX
XXXX on XX/XX/XXXX
XXXX on XX/XX/XXXX

During the lifetime of Optionee, the Option shall be exercisable only by Optionee. The Option shall not be assignable or transferable by Optionee, other than by will or the laws of descent and distribution. The vesting of the Option is subject to acceleration under the circumstances described in Section 4.

     3. Effect of Termination of Relationship with the Company.

     (a) In the event that Optionee shall cease to be employed by the Company or its subsidiaries, for any reason other than Optionee’s gross and willful misconduct or Optionee’s death or disability, Optionee shall have the right to exercise the Option at any time within three months after such termination of employment to the extent of the full number of Shares Optionee was entitled to purchase under the Option on the date of termination, subject to the condition that the Option shall not be exercisable after the expiration of its term.

     (b) In the event that Optionee shall cease to be employed by the Company or its subsidiaries by reason of Optionee’s gross and willful misconduct during the course of his/her employment with the Company (as reasonably determined by the Company), the Option shall terminate as of the date of the misconduct and shall not be exercisable thereafter.

     (c) If Optionee shall die while employed by the Company or its subsidiaries, or within three months after termination of his/her employment with the Company for any reason other than gross and willful misconduct, or if Optionee shall become disabled within the meaning of Section 22(e)(3) of the Code while employed by the Company or its subsidiaries, and Optionee shall not have fully exercised the Option, the Option may be exercised at any time within twelve months after Optionee’s death or disability by the legal representative or, if applicable, guardian of Optionee or by any person to whom the Option is transferred by will or the applicable laws of descent and distribution to the extent of the full number of Shares Optionee was entitled to purchase under the Option on the date of death (or termination of his/her employment, if earlier) or disability and subject to the condition that the Option shall not be exercisable after the expiration of its term.

     (d) With respect to the Option and any other incentive stock option granted to Optionee, Optionee understands that to the extent that the aggregate fair market value (determined as of the date of the Option and each other such incentive stock option) of the shares of Common Stock issuable upon exercise of the Option and all other incentive stock options which become exercisable for the first time by Optionee during any calendar year exceeds $100,000, then, in accordance with Section 422(d) of the Code, the portion of the Option and any such other incentive stock options that exceed $100,000 shall be treated as options that do not qualify as incentive stock options.

     4. Change in Control.

     (a) Except for an assumption of the Option as described in subsection (d), in the event that a “Change in Control” (as hereinafter defined) occurs, the vesting schedule set forth in Section 2 shall accelerate and the Option shall become exercisable with respect to 50% of the unvested Shares upon the occurrence of such transaction; provided, however, that if, in connection with the consummation of the transaction resulting in the Change in Control, the Optionee is offered consideration, in exchange for the Option, equal to the excess of the value received for one share of Common Stock in such transaction over the exercise price of the Option multiplied by the number of Shares subject thereto, the Option shall terminate upon the consummation of the Change in Control.

     (b) A “Change in Control” of the Company shall be deemed to have occurred if:

(i)	Any “person” (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) who did not own shares of the capital stock of the Company on the date of grant of the Option shall, together with his, her or its “Affiliates” and “Associates” (as such terms are defined in Rule 12b-2 promulgated under the Exchange Act), become the “Beneficial Owner” (as such term is defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company’s then outstanding securities (any such person being hereinafter referred to as an “Acquiring Person”);
(ii)	The “Continuing Directors” (as hereinafter defined) shall cease to constitute a majority of the Company’s Board of Directors;
(iii)	There should occur (A) any consolidation or merger involving the Company and the Company shall not be the continuing or surviving corporation or the shares of the Company’s capital stock shall be converted into cash, securities or other

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property; provided, however, that this subclause (A) shall not apply to a merger or consolidation in which (i) the Company is the surviving corporation and (ii) the shareholders of the Company immediately prior to the transaction have the same proportionate ownership of the capital stock of the surviving corporation immediately after the transaction; (B) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company; or (C) any liquidation or dissolution of the Company; or

(iv) The majority of the Continuing Directors determine, in their sole and absolute discretion, that there has been a Change in Control.

     (c) “Continuing Director” shall mean any person who is a member of the Board of Directors of the Company, while such person is a member of the Board of Directors, who is not an Acquiring Person, an Affiliate or Associate of an Acquiring Person or a representative of an Acquiring Person or of any such Affiliate or Associate and who (i) was a member of the Company’s Board of Directors on the date of grant of the Option or (ii) subsequently became a member of the Board of Directors, upon the nomination or recommendation, or with the approval of, a majority of the Continuing Directors.

     5. Manner of Exercise.

     (a) The Option may only be exercised by Optionee or other proper party within the option period by delivering written notice of exercise to the Company at its principal executive office. The notice shall state the number of Shares as to which the Option is being exercised and shall be accompanied by payment in full of the option price for all of the Shares designated in the notice.

     (b) Optionee may, at the Company’s election, pay the option price in cash, by check (bank check, certified check or personal check) or by any other means set forth in the Plan.

     (c) The exercise of the Option is contingent upon receipt from Optionee (or other proper person exercising the Option) of a representation that, at the time of such exercise, it is Optionee’s intention to acquire the Shares being purchased for investment and not with a view to the distribution or sale thereof within the meaning of the Securities Act of 1933, as amended (the “Securities Act”); provided, however, that the receipt of such representation shall not be required upon exercise of the Option if, at the time of such exercise, the issuance of the Shares subject to the Option shall have been properly registered under the Securities Act and all applicable state securities laws. Such representation shall be in writing and in such form as the Company may reasonably request. The certificate representing the Shares so issued for investment shall be imprinted with an appropriate legend setting forth all applicable restrictions on their transferability.

     6. Adjustments. If Optionee exercises all or any portion of the Option subsequent to any change in the Common Stock through merger, consolidation, reorganization, recapitalization, stock dividend, stock split or other change in the corporate or capital structure of the Company, Optionee shall then receive for the aggregate price paid by him or her on such exercise, the number and type of securities or other consideration which he or she would have received if the Option had been exercised prior to the event changing the outstanding Common Stock in order to prevent dilution or enlargement of the rights granted hereunder.

     7. Miscellaneous.

     (a) The Option is issued pursuant to the Plan and is subject to its terms. Optionee hereby acknowledges receipt of a copy of the Plan. The Plan is also available for inspection during business hours at the principal office of the Company.

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     (b) This Agreement shall not confer on Optionee any right with respect to continuance of employment by the Company or any of its subsidiaries, nor will it interfere in any way with the right of the Company to terminate such employment at any time. Optionee shall have none of the rights of a shareholder with respect to the Shares until such Shares shall have been issued to him or her upon exercise of the Option.

     (c) The Company shall at all times during the term of the Option reserve and keep available such number of Shares as will be sufficient to satisfy the requirements thereof. The exercise of all or any part of the Option shall only be effective at, and may be deferred until, such time as the sale of the Shares pursuant to such exercise will not violate any federal or state securities laws, it being understood that the Company shall have no obligation to register the issuance or sale of the Shares for such purpose.

     (d) If Optionee shall dispose of any of the Shares acquired upon exercise of the Option within two years from the date hereof or within one year after exercise of the Option, then, in order to provide the Company with the opportunity to claim the benefit of any income tax deduction that may be available to it under the circumstances, Optionee shall promptly notify the Company of the dates of acquisition and disposition of such Shares, the number of Shares so disposed of, and the consideration, if any, received for such Shares. In order to comply with all applicable federal and state income tax laws and regulations, the Company may take such action as it deems appropriate to ensure that, if necessary, all applicable federal or state payroll, withholding, income or other taxes are withheld or collected from Optionee.

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the day and year first above written.

Restore Medical, Inc.
By:		Date:
	J. Robert Paulson, Jr.
	President and CEO
		Date:
	Optionee

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EX-10.9

Exhibit 10.9

Restore Medical, Inc.
Non-Qualified Stock Option Agreement
Grant ID 0000000000XXX

     THIS AGREEMENT, made as of this                                          by and between Restore Medical, Inc., a Delaware corporation (the “Company”), and                      (“Optionee”).

     WHEREAS, the Company, pursuant to the 1999 Omnibus Stock Plan (the “Plan”), wishes to grant this stock option to Optionee;

     NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained, the parties hereto hereby agree as follows:

     1. Grant of Option. The Company hereby grants to Optionee the right and option (the “Option”) to purchase all or any part of an aggregate of  XXXX shares (the “Shares”) of the common stock, par value $.01 per share (the “Common Stock”), of the Company at the price of  $XX.XX  per Share on the terms and conditions set forth herein. It is understood and agreed that such price is not less than 100% of the fair market value of each such Share on the date of this Agreement. The Option is not intended to be entitled to treatment as an incentive stock option within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended (the “Code”).

     2. Duration and Exercisability. The Option may not be exercised by Optionee except as set forth below, and the Option shall in all events terminate ten years from the date hereof. Subject to the other terms and conditions set forth herein, the Option shall vest and may be exercised by Optionee in cumulative installments as follows:

     Vesting Schedule:

XXXX on XX/XX/XXXX
XXXX on XX/XX/XXXX
XXXX on XX/XX/XXXX
XXXX on XX/XX/XXXX
XXXX on XX/XX/XXXX
XXXX on XX/XX/XXXX
XXXX on XX/XX/XXXX
XXXX on XX/XX/XXXX

During the lifetime of Optionee, the Option shall be exercisable only by Optionee. The Option shall not be assignable or transferable by Optionee, other than by will or the laws of descent and distribution. The vesting of the Option is subject to acceleration under the circumstances described in Section 4.

     3. Effect of Termination of Relationship with the Company.

     (a) In the event that Optionee’s relationship with the Company or its subsidiaries shall terminate, for any reason other than Optionee’s gross and willful misconduct or Optionee’s death or disability, Optionee shall have the right to exercise the Option at any time within five years after such termination to the extent of the full number of Shares Optionee was entitled to purchase under the Option on the date of termination, subject to the condition that the Option shall not be exercisable after the expiration of its term.

     (b) In the event that Optionee’s relationship with the Company or its subsidiaries shall terminate by reason of Optionee’s gross and willful misconduct during the course of his/her relationship with the Company (as reasonably determined by the Company), the Option shall terminate as of the date of the misconduct and shall not be exercisable thereafter.

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     (c) If Optionee shall die during its relationship with the Company or its subsidiaries, or within three months after termination of such relationship with the Company for any reason other than gross and willful misconduct, or if Optionee shall become disabled within the meaning of Section 22(e)(3) of the Code during its relationship with the Company or its subsidiaries, and Optionee shall not have fully exercised the Option, the Option may be exercised at any time within twelve months after Optionee’s death or disability by the legal representative or, if applicable, guardian of Optionee or by any person to whom the Option is transferred by will or the applicable laws of descent and distribution to the extent of the full number of Shares Optionee was entitled to purchase under the Option on the date of death (or termination of its relationship with the Company, if earlier) or disability and subject to the condition that the Option shall not be exercisable after the expiration of its term.

     4. Change in Control

     (a) Except for an assumption of the Option as described in subsection (d), in the event that a “Change in Control” (as hereinafter defined) occurs, the vesting schedule set forth in Section 2 shall accelerate and the Option shall become exercisable with respect to 100% of the unvested Shares upon the occurrence of such transaction; provided, however, that if, in connection with the consummation of the transaction resulting in the Change in Control, the Optionee is offered consideration, in exchange for the Option, equal to the excess of the value received for one share of Common Stock in such transaction over the exercise price of the Option multiplied by the number of Shares subject thereto, the Option shall terminate upon the consummation of the Change in Control.

     (b) A “Change in Control” of the Company shall be deemed to have occurred if:

     (i) Any “person” (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) who did not own shares of the capital stock of the Company on the date of grant of the Option shall, together with his, her or its “Affiliates” and “Associates” (as such terms are defined in Rule 12b-2 promulgated under the Exchange Act), become the “Beneficial Owner” (as such term is defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company’s then outstanding securities (any such person being hereinafter referred to as an “Acquiring Person”);

     (ii) The “Continuing Directors” (as hereinafter defined) shall cease to constitute a majority of the Company’s Board of Directors;

     (iii) There should occur (A) any consolidation or merger involving the Company and the Company shall not be the continuing or surviving corporation or the shares of the Company’s capital stock shall be converted into cash, securities or other property; provided, however, that this subclause (A) shall not apply to a merger or consolidation in which (i) the Company is the surviving corporation and (ii) the shareholders of the Company immediately prior to the transaction have the same proportionate ownership of the capital stock of the surviving corporation immediately after the transaction; (B) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company; or (C) any liquidation or dissolution of the Company; or

     (iv) The majority of the Continuing Directors determine, in their sole and absolute discretion, that there has been a Change in Control.

     (c) “Continuing Director” shall mean any person who is a member of the Board of Directors of the Company, while such person is a member of the Board of Directors, who is not an Acquiring Person, an Affiliate or Associate of an Acquiring Person or a representative of an Acquiring Person or of any such Affiliate or Associate and who (i) was a member of the Company’s Board of Directors on the date of grant of the Option or (ii) subsequently became a member of the Board of Directors, upon the nomination or recommendation, or with the approval of, a majority of the Continuing Directors.

     (d) In the case of a Change of Control as described in Subsections (b)(iii)(A) or (B), the Options may be assumed by the surviving or acquiring corporation, as the case may be.

     5. Manner of Exercise.

     (a) The Option may only be exercised by Optionee or other proper party within the option period by delivering written notice of exercise to the Company at its principal executive office. The notice shall state the

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number of Shares as to which the Option is being exercised and shall be accompanied by payment in full of the option price for all of the Shares designated in the notice.

     (b) Optionee may, at the Company’s election, pay the option price in cash, by check (bank check, certified check or personal check) or by any other means set forth in the Plan.

     (c) The exercise of the Option is contingent upon receipt from Optionee (or other proper person exercising the Option) of a representation that, at the time of such exercise, it is Optionee’s intention to acquire the Shares being purchased for investment and not with a view to the distribution or sale thereof within the meaning of the Securities Act of 1933, as amended (the “Securities Act”); provided, however, that the receipt of such representation shall not be required upon exercise of the Option if, at the time of such exercise, the issuance of the Shares subject to the Option shall have been properly registered under the Securities Act and all applicable state securities laws. Such representation shall be in writing and in such form as the Company may reasonably request. The certificate representing the Shares so issued for investment shall be imprinted with an appropriate legend setting forth all applicable restrictions on their transferability.

     6. Adjustments. If Optionee exercises all or any portion of the Option subsequent to any change in the Common Stock through merger, consolidation, reorganization, recapitalization, stock dividend, stock split or other change in the corporate or capital structure of the Company, Optionee shall then receive for the aggregate price paid by him or her on such exercise, the number and type of securities or other consideration which he or she would have received if the Option had been exercised prior to the event changing the outstanding Common Stock in order to prevent dilution or enlargement of the rights granted hereunder.

     7. Miscellaneous.

     (a) The Option is issued pursuant to the Plan and is subject to its terms. Optionee hereby acknowledges receipt of a copy of the Plan. The Plan is also available for inspection during business hours at the principal office of the Company.

     (b) This Agreement shall not confer on Optionee any right with respect to continuance of employment by or continuance of the relationship with the Company or any of its subsidiaries, nor will it interfere in any way with the right of the Company to terminate such employment at any time. Optionee shall have none of the rights of a shareholder with respect to the Shares until such Shares shall have been issued to him or her upon exercise of the Option.

     (c) The Company shall at all times during the term of the Option reserve and keep available such number of Shares as will be sufficient to satisfy the requirements thereof. The exercise of all or any part of the Option shall only be effective at, and may be deferred until, such time as the sale of the Shares pursuant to such exercise will not violate any federal or state securities laws, it being understood that the Company shall have no obligation to register the issuance or sale of the Shares for such purpose.

     (d) If Optionee shall dispose of any of the Shares acquired upon exercise of the Option within two years from the date hereof or within one year after exercise of the Option, then, in order to provide the Company with the opportunity to claim the benefit of any income tax deduction that may be available to it under the circumstances, Optionee shall promptly notify the Company of the dates of acquisition and disposition of such Shares, the number of Shares so disposed of, and the consideration, if any, received for such Shares. In order to comply with all applicable federal and state income tax laws and regulations, the Company may take such action as it deems appropriate to ensure that, if necessary, all applicable federal or state payroll, withholding, income or other taxes are withheld or collected from Optionee.

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     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the day and year first above written.

RESTORE MEDICAL, INC.
By:		Date:
	J. Robert Paulson, Jr.
	President and CEO
		Date:
	Optionee

4

EX-10.10

Exhibit 10.10

RESTORE MEDICAL, INC.

MANAGEMENT INCENTIVE PLAN

1. PURPOSES.

     (a) The purpose of the Plan is to provide a means by which selected Key Employees of the Company may be given an opportunity to participate in the proceeds of a Change of Control transaction.

     (b) The Company, by means of the Plan, seeks to retain the services of persons who are now Key Employees of the Company, to secure and retain the services of new Key Employees, and to provide incentives for such persons to exert maximum efforts for the success of the Company.

2. DEFINITIONS.

     (a) “Management Bonus” means an amount of cash and/or securities, determined pursuant to the Plan, equal to twenty-five percent (25%) of the total amount of gross proceeds upon a Change of Control, if any, in excess of $72,000,000, up to a maximum aggregate bonus of $3,300,000.

     (b) “Board” means the Board of Directors of the Company.

     (c) “Change of Control” means any consolidation or merger of the Company with or into another corporation or entity (after which the pre-existing shareholders of the Company do not own a majority of the outstanding shares of the surviving entity), an acquisition or sale of substantially all of the assets of the Company or a sale of stock in a single transaction (or several related transactions) to one person (or a group acting together) who, as a result of such transaction, shall own more than 50% voting control of the Company, or any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company.

     (d) “Closing” means the closing of a transaction constituting a Change of Control.

     (e) “Company” means Restore Medical, Inc., a Minnesota corporation.

     (f) “Key Employee” means any current or former employee or consultant of the Company who is designated by the Chief Executive Officer and approved by the Board from time to time as a Key Employee. The individuals currently designated as Key Employees are set forth on Exhibit A of the Plan.

     (g) “Plan” means this Restore Medical, Inc. Management Incentive Plan.

     (h) “Restated Articles” means the Amended and Restated Articles of Incorporation of Restore Medical, Inc.

3. ADMINISTRATION.

     (a) The Plan shall be interpreted and administered by the Board, whose actions shall be final, binding and conclusive on all persons, including the Key Employees. The Board may, in its sole discretion, increase, decrease or eliminate a previously authorized percentage allocation to a Key Employee upon a determination by the Board that such percentage is no longer reflective of the Key Employee’s contributions to the Company. Any such increase of a percentage for a Key Employee shall decrease the other percentages of Key Employees and any such decrease or elimination of a percentage for a Key Employee by the Board shall increase the other percentages of Key Employees, in each case, on a pro rata basis unless otherwise designated by the Chief Executive Officer and approved by the Board.

     (b) The Board, in its sole discretion, shall have the power, subject to, and within the limitations of, the express provisions of the Plan:

     (i) To approve from time to time which employees of the Company are designated by the Chief Executive Officer as Key Employees entitled to participate in the Plan. This authority shall also include the ability to approve the proposal by the Chief Executive Officer and the Executive Chairman that one or more employees previously designated as Key Employees shall no longer be entitled to participate in the Plan.

     (ii) To approve the percentage allocation of the cash or securities in the Management Bonus to each of the Key Employees proposed by the Chief Executive Officer.

     (c) The Board may delegate some or all of its powers and responsibilities under the Plan to a committee of the Board.

4. ALLOCATION OF MANAGEMENT BONUS.

     (a) The allocation of the Management Bonus to individuals designated as Key Employees as of the date hereof shall be as set forth on Exhibit A, and subject to the terms of this Plan.

     (b) In the event that the Company’s outside accounting firm determines that a distribution to a Key Employee under Section 5 would result in the imposition of a “parachute payment” excise tax under Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), the Chief Executive Officer may reallocate the Management Bonus among Key Employees in a manner that reduces or eliminates the amount of such excise tax.

     (c) Any percentage amounts that are unallocated at the time of a Change of Control shall be allocated immediately prior to such Change in Control in accordance with the recommendation of the Company’s Chief Executive Officer and approval of the Board. If no such recommendation is provided and Board approval received, such unallocated percentage amounts shall be distributed on a pro-rata basis among the existing Key Employees at such time.

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5. DISTRIBUTIONS.

     (a) If the conditions for distributions set forth in the Plan are satisfied, each Key Employee shall be entitled to receive upon the Closing and simultaneously with payments to the Company’s shareholders, a distribution equal to (i) such Key Employee’s allocation of the Management Bonus times (ii) the aggregate dollar value of the Management Bonus, subject to the limitations set forth in Section 4 above. Such distributions shall be made in cash and/or securities, as determined by the Board, in its sole discretion. While generally each participant will receive his or her distributive share of the Management Bonus in the same form or forms of payment and in the same proportions paid by the purchaser(s) upon the Change of Control, the Board shall have the discretion to restructure the form and timing of payment of such distributions to accommodate the business objectives of the Company in the Change of Control, which may include, but not be limited to, (x) consideration of the tax consequences to the Company, its shareholders, and the Plan’s participants, (y) financial accounting consequences for the Company or the acquiror, and (z) satisfaction of any applicable securities law requirements.

     (b) Any securities that are issued to the Key Employees pursuant to this Plan shall be subject to the same or similar restrictions as imposed by a purchaser on the securities of the Company’s shareholders as set forth in the agreement pursuant to which the Control of Control occurs.

     (c) Subject to any adjustments made under Section 5(a) above, if any, payments to Key Employees under the Plan shall be made within 30 days of the Closing (provided that proceeds from the Change of Control event shall have been made available to the Company within such period, or otherwise immediately upon receipt of such proceeds from the Change of Control), except for payments to be made with respect to contingent payments payable in connection with a Change of Control, which shall be made as soon as administratively reasonable following the receipt by the Company or its shareholders of such payments.

     (d) Key Employees must be employed as of the closing date of the Change of Control transaction in order to be eligible to receive any payments pursuant to the Plan.

6. AMENDMENT OR TERMINATION OF THE PLAN.

     (a) The Board at any time, and from time to time prior to the Closing, may amend or terminate the Plan, so long as such actions are approved after consultation with the Chief Executive Officer and, subject to Section 3(a), do not adversely affect any beneficiary of this Plan.

     (b) The Plan shall automatically terminate upon the earliest to occur of (i) December 31, 2003, unless a Change of Control has occurred prior to such date, (ii) the Closing and completion of all payments under the terms of the Plan, and (iii) the automatic conversion of all of the Company’s outstanding preferred stock into common stock pursuant to Section 3.7 of the Restated Articles (or any successor provision thereto).

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7. NO GUARANTEE OF FUTURE SERVICE.

     Selection of an individual to participate in the Plan shall not provide any guarantee or promise of continued service of the participant with the Company, and the Company retains the right to terminate the employment of any employee at any time, with or without cause, for any reason or no reason, except as may be restricted by law or contract.

8. TAX WITHHOLDING.

     The Company shall withhold from any distributions under the Plan any amount required to satisfy the Company’s income and employment tax withholding obligations under any applicable Federal and State laws.

9. COMPANY OBLIGATIONS.

     The Plan shall constitute a liability of the Company that shall be satisfied prior to any distributions to shareholders of the Company. Further, the Company shall use its best efforts to provide that a portion of the net proceeds from any transaction that results in a Change in Control be distributed in substantial accordance with the terms of this Plan, subject to the fiduciary duties applicable to the Company and the Board; provided, however, that failure by the Chief Executive Officer to propose a reasonable initial recommendation of allocations for the Management Bonus or failure by the Board to reasonably approve such initial recommendation shall not operate to delay, block or otherwise impede the Company’s undertaking a Change of Control or making payments to the Company’s shareholders resulting therefrom

10. CHOICE OF LAW.

     All questions concerning the construction, validation and interpretation of the Plan will be governed by the law of the State of Minnesota.

11. SUCCESSORS; THIRD PARTY BENEFICIARIES.

     This Plan shall be binding upon any successor to the Company. The Company acknowledges that the Key Employees will rely on the provisions of this Plan and therefore agrees that the Key Employees shall be deemed to be third parties beneficiaries hereof.

12. SEVERABILITY.

     If any provision of this Plan is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions shall nevertheless continue in full force and effect without being impaired or invalidated in any way and shall be construed in accordance with the purposes, tenor and effect of this Plan.

13. HEADINGS.

     The headings in the Plan are inserted for convenience only and shall not be deemed to constitute a part hereof nor to affect the meaning thereof.

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     The Plan has been adopted by the Board of Directors of the Company effective as of the 12^th day of June, 2003

RESTORE MEDICAL, INC.
By:	/s/ Susan L. Critzer
	Name:	Susan L. Critzer
	Title:	President and Chief Executive Officer

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EXHIBIT A

Name of Key Employee	Percent of Management Bonus
Mark B. Knudson		10.0	%
Susan L. Critzer		14.0	%
Bob Campbell		10.0	%
Ed Numainville		7.5	%
Tim Conrad		3.0	%
Robert S. Nickoloff		3.0	%
Brian Erickson		3.0	%
Phil Radichel		3.0	%
John Sopp		3.0	%
Jim Kruse		3.0	%
Dale Noel		3.0	%
Lisa Asper		3.0	%
Dean Horstman		3.0	%
Dave Coleman		3.0	%
Glen Peterson		3.0	%
Brett Biener		3.0	%
New Sales Representative		3.0	%
All Other Employees		15.0	%
TOTAL:		100.0	%

A-1

EX-10.12

Exhibit 10.12

QUALITY FIRST INTERNATIONAL

EU Authorised Representative Contract for Services

This contract is between Restore Medical, Inc., 2800 Patton Road, Roseville, Minnesota 55113, USA (referred to in this contract as the Company) and Quality First International (referred to in this contract as QFI) of: Suites 317/318, Burford Business Centre, 11 Burford Road, Stratford, London, E15 2ST, United Kingdom.

Contact for the Company: Mr. E. Numainville

Contact for QFI: H. Atchia

Date of commencement: 16 June 2003

Leading People — Leading Change

      Quality First International is a trading name of Quality First International Limited, a company registered in England No 03103506. Registered Office 20 Eversley Road, Bexhill on Sea, East Sussex, TN40 1HE, United Kingdom

1.0 Provision of QFI personnel

1.1 QFI agree to act as the Company’s EU Authorised Representative.

1.2 The technical competence and necessary experience required by such a role will be provided by Mr H Atchia, Technical Director currently registered with the appropriate Competent Authorities as EU Authorised Representative, for the products covered by this contract and referred to in QFI form Schedule A.

1.3 The administration of the services provided under this contract and responsibility for liaising between the Company and QFI, and QFI and the Competent Authority will be provided by the EU Authorised Representative Client Co-ordinator (EURCC), appointed by QFI from QFI’s full-time staff.

2.0 Services provided by QFI

2.1 Interpretation of requirements.

2.2 Completion, review, approval and submission of all necessary documentation required by the Competent Authority.

2.3 Registration of these matters on the Company’s behalf.

2.4 Safe keeping of all copies of the Company’s current listings of products registered by QFI with the Competent Authority on the Company’s behalf covered by the Declaration of Conformity.

2.5 Safe keeping of records relating to discussions with the Competent Authorities on the Company’s behalf.

2.6 Receipt of information concerning incidents referred to in Article 10 of the Council Directive 93/42/EEC (commonly known as the Medical Devices Directive) and/or Article 11 of Council Directive 98/79/EC (commonly known as the In vitro Diagnostic Medical Devices Directive) and 65/65/EEC (relating to medicinal products as applied to Blood Bags) communication of such information to the Company.

3.0 Responsibility of the Company

3.1 The Company should ensure that the Medical Devices Vigilance system guidelines are made known to persons responsible for placing devices on the market and any other agents authorised to act on the Company’s behalf so that the Company’s responsibilities may be fulfilled.

3.2 The Company must report all incidents fulfilling the notification criteria as well as notifications such as Product Recall and Safety Alert notices to QFI.

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3.3 The Company shall institute documented procedures for alerting QFI of changes in relevant company and product information in order for QFI to complete any registration or re-registration of products/personnel with the Competent Authority.

3.3.1 Such information shall include the Company contact person for the purposes of communication with QFI, product range (including new products and products to be discontinued, change of intended use or other factors that alter the classification of the product under the rules specified in Annex IX Council Directive 93/42/EEC as relevant and any relevant compliance issues which could affect such registration).

3.3.2 The QFI Schedule A form (or agreed equivalent) shall be used for such purposes.

4.0 Timescale for the initial reporting of an incident or near incident

4.1 Incidents ten (10) days.

4.2 Near incidents thirty (30) days.

4.3 The times given above are the maximum times for determining the relevant facts and making an initial report to the appropriate Competent Authority.

4.4 Due to the strict reporting timetable requirements the Company must have a sound and effective reporting mechanism in place between the Company’s end users, the Company’s distributors and the Company’s own organisation which will allow speedy and complete reporting to the Company’s EU Authorised Representative. Once the Company is aware of an incident or near incident, it must ensure notification to QFI within twenty four (24) hours.

5.0 Systematic recalls

5.1 Any technical or medical reason for the systematic recall of a device is required by the Directives to be notified by the manufacturer to the appropriate Competent Authority.

5.2 Copies of advisory notices implementing recalls should be sent by the manufacturer to the appropriate Competent Authority before or at the same time as the notices are sent to the relevant users.

6.0 Commercial removal from the market

6.1 Removals from the market for a purely commercial reason are not required to be reported to the relevant Competent Authority but should be reported to QFI.

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7.0 Labelling & packaging requirements

7.1 The Company is obliged to list QFI’s details as agreed on all labels, packaging or user instruction manuals/leaflets.

EU Authorised Representative
QUALITY FIRST INTERNATIONAL
20 Eversley Road
Bexhill on Sea
East Sussex
TN401HE
United Kingdom

Telephone: +44-208-221-2361
Telefax:      +44-208-221-1912

7.2 Copy artwork of the EU Authorised Representative details must be sent to QFI for approval before going to print.

7.3 QFI guarantees that the address, telephone and fax details will not change without a sufficient period of notice to be agreed, save for any changes in area code as may be made by the telephone companies.

7.4 Any variation in the appearance and details on labels, packaging and user instruction manuals or leaflets must be agreed between the Company and QFI.

8.0 Confidential information

8.1 QFI will not disclose confidential information relating to the services under this contract to any third party. This does not affect the obligation of QFI to provide information under civil or criminal law.

9.0 Work records

9.1 QFI will keep records of all work done under the contractual terms in accordance with QFI’s standard approved procedures.

10.0 Fees

10.1 Where this contract is first entered into between QFI and the Company a First registration fee of US $195 (one hundred and ninety-five Dollars US) payable on return of the signed contract by the Company.

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10.2 Annual fee for undertaking the role of EU Authorised Representative, is US $3245 (three thousand two hundred and forty-five Dollars US) for the contract period of TWELVE (12) months from the date of signature by the Company, payable on return of the signed contract, covering up to TEN (10) reported incidents or other notifications to the Competent Authority within that TWELVE (12) month period.

10.2.1 QFI will maintain the annual fee for undertaking the role of EU Authorised Representative for a period of three (3) years commencing the execution of this contract

10.2.2 Registration of additional products and changes to an existing, registered product attracts a unit charge of US $125 (one hundred and twenty-five Dollars US) for each product.

10.3 Any additional reported incidents or other notifications will be charged at an individual rate of US $125 (one hundred and twenty-five Dollars US) each as an additional unit fee.

10.3.1 QFI will maintain the additional unit fee for a period of three (3) years commencing the execution of this contract.

10.4 The Company agrees to make all payments by bank transfer.

10.4.1 Payment by bank transfer shall be made nett of charges to Quality First International Limited’s account at HSBC Plc, Hastings Branch, Hastings, East Sussex, TN34 1HW, United Kingdom, Bank swift code 40-05-15, account 39157053 605837285-561, IRAN GB10 MIDL 4005 1539 1570 53, BIC MIDLGB22.

10.4.2 The Company shall ensure all bank charges for transfers are paid and that nett amounts are received in QFI’s account

10.5 Banking wire transfer charges per transfer of US $45 (forty-five Dollars US).

10.6 All amounts due must be received gross by QFI.

11.0 Extra charges

11.1 The Company will be responsible for all additional charges incurred by QFI as a result of the provision of services where the Competent Authority requires work of QFI which is not part of the normal reporting procedure.

11.2 QFI will keep the Company informed when this occurs and where possible inform the Company in advance of the likely cost of this additional requirement from the Competent Authority.

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12.0 Payment terms

12.1 Invoices requesting First Registration Fee and the Annual Fee must be paid in full before QFI will undertake the provision of the above services.

12.2 Where the Company forwards details of any additional reported incidents or other notifications to QFI over and above the agreed TEN (10) (as referred to in Section 10.2 above) the Company shall at the same time forward to QFI the additional unit fee (as referred to in Section 10.3)

13.0 Advice & information

13.1 The EU Authorised Representative Contract in principle is for QFI to act as a receiving and forwarding communications representative between the Company and the Competent Authority.

13.2 The reporting time requirements are the responsibility of the Company through the creation of suitable systems and procedures to ensure notification of adverse incidents meeting the notification criteria of the Medical Device Vigilance system (MDVs) guidelines.

13.2.1 Where necessary, the Company’s procedures for MDVs notification shall be harmonised to ensure QFI’s turnaround time for completion of such notification can be fulfilled.

13.2.2 The Company will ensure that any adverse incident notification submissions are communicated to QFI in finished from no less than one working day before the expiry of the relevant reporting time requirement for notification to the Competent Authority by QFI.

13.2.3 QFI will implement documented procedures to ensure notification time requirements of the MDVs guidelines are achievable.

13.3 The accuracy of the details of any reported incident and/or notification are the responsibility of the Company.

13.3.1 QFI will implement documented procedures to ensure review of adverse incident reports and will confirm completion of notifications made to the Competent Authority within one (1) working day to the Company.

13.3.2 QFI will implement documented procedures to ensure review and communication of relevant adverse incident communications from the Competent Authority within one (1) working day to the Company.

13.4 The provision of advice and/or information by QFI is in confidence.

13.5 Liability other than death or personal injury as the result of the provision of advice and/or information by QFI, is hereby excluded.

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14.0 Renewal

14.1 Upon the anniversary of the date of commencement, continuation of the EU Authorised Representative Contract may be entered into subject to:

(a) satisfactory annual technical documentation review of the Company’s file.

(b) the receipt by QFI of the fees for the forthcoming years service.

15.0 Termination

15.1 This contract will terminate upon a breach of condition by either party where the injured party elects not to continue with the contract

15.2 By the Company serving written notice on QFI stating that

(1) QFI details have been removed from all Company labels and

(2) that QFI is no longer the EU Authorised Representative of the. Company.

15.3 By QFI serving written notice on the Company stating that

(1) QFI no longer acts as the Company EU Authorised Representative and

(2) stating that QFI requires the Company to remove all QFI details from all Company labels.

15.4 The period of written notice as referred to in 15.2 and 15.3 shall be a reasonable period taking into account the length of time the contract period has to run. Where there is a dispute as to length of written notice, term 16.1 shall apply.

16.0 Arbitration

16.1 In the event of any dispute whether as to law or fact or mixed law and fact between the Company and QFI, the parties agree to resolve the dispute amicably failing which the dispute will be referred to an arbitrator appointed by the Chartered Institute of Arbitrators. The arbitrator’s decision shall be final.

17.0 Start date

17.1 QFI will consider itself bound by the terms of this contract for the contract period from 1 January 2005 upon signature by the Company.

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18.0 Acceptance

As agent for QFI	/s/ H. Atchia
Title:	Technical Director
Name:	H A R D Atchia
Date:	January 25, 2005
Accepted on the terms herein stated:

As agent for the Company: /s/ Edward W. Numainville

Title: Vice President Regulatory/Clinical Affairs

Name: Edward W. Numainville

Date: February 9, 2005

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EU Authorized Representative Contract for Services

Annual renewal of EU authorized representative contact

In accordance with the Renewal term 14.1 (a) and (b), please sign below and confirm:

(1) that you will provide QFI with the following:

(i) updates for various products you sell bearing the CE marking of conformity to update the Product Registration File we have notified to the Competent Authority.

(ii) Copies of the latest versions of the following information for all products placed on the market since initial CE marking by your company plus any new product (as agreed):

     a) Description of each product,

     b) Intended use of each product, including an example of unit and outer labels and Instructions for Use or equivalent),

     c) Declaration of Conformity,

     d) CE and Quality System Certificates,

     e) Date of commencement of manufacture of each product,

     f) A list of all technical documentation and related certificates,

     g) Breakdown of complaints, corrective and preventive action performed for these complaints plus complaints analysis,

     h) Hazard evaluation (risk analysis), including the Risk Management File according to EN 1441/EN ISO 14971,

     i) “technical” file or summary of content,

     j) List of design changes since First Placement of the Product on the Market with the CE marking of conformity,

     k) Copies of the relevant registration letters, authorisations and Certificates issued by regulatory authorities and other inspection bodies for the device.

     l) 27 original letters of appointment of QFI as EUAR for the Company.

for US manufacturers, please would also send the following documents with FDA:

     a) Establishment Registration,

     b) Device listing.

(iii) Summary of clinical data for each product according to Article 15/Annex X Council Directive 93/42/EEC

so that the annual technical documentation review of your company’s file may be conducted.

(2) that the amount of $3245.00 will be forwarded to QFI by return, together with the transfer charge of $45 in accordance with term 10.4.

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As agent for QFI	/s/ H. Atchia
Title:	Technical Director
Name:	H A R D Atchia
Date:	January 25, 2005
Accepted on the terms herein stated:

As agent for the Company: /s/ Edward W. Numainville

Title: Vice President Regulatory/Clinical Affairs

Name: Edward W. Numainville

Date: February 9, 2005

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EX-10.13

Exhibit 10.13

DISTRIBUTION AGREEMENT

     THIS AGREEMENT is made as of 20 January 2005 (the “Effective Date”) by and between Restore Medical, Inc., a Minnesota corporation having its principal place of business at 2800 Patton Road, Roseville, Minnesota 55113 USA (“Restore”) and Sonomed Ltd., a company organized under the laws of Israel and having its principal place of business at 40/42 Hatizmoret Str., Rishon Le Zion, Zip 75562, Israel (“Distributor”).

RECITALS

A.	Restore has developed a proprietary implantable medical device as more fully described in Exhibit A (the “Products”).
B.	Restore wishes to appoint Distributor, and Distributor wishes to be appointed, as a distributor of the Products in the territory set forth in Exhibit A (the “Territory”).

1. APPOINTMENT

     1.1 Scope. Subject to the terms and conditions of this Agreement, Restore hereby appoints Distributor, and Distributor hereby accepts appointment, as Restore’s exclusive distributor of the Products listed in Exhibit A in the Territory. So long as Distributor is Restore’s exclusive distributor of the Products in the Territory under the terms of this Agreement, and subject to the laws and regulations applicable in the Territory, Restore agrees that it will not sell or distribute the Products in the Territory, directly or through third parties.

     1.2 Subdistributors. Distributor may appoint subdistributors that are duly licensed in the Territory to promote and/or distribute Products within the Territory, provided that Distributor obtains Restore’s prior written approval to such appointment, which approval Restore may grant or withhold in its sole discretion. In no event shall any such subdistributor be allowed to promote, market or distribute products which compete with the Products without Restore’s prior written consent. Distributor shall at all times remain fully liable for and shall indemnify and hold Restore harmless for the performance of its subdistributors.

     1.3 Sales Outside the Territory. Distributor shall not sell the Products to customers outside the Territory.

     1.4 Competitive Products. During the term of this Agreement, Distributor shall not, either directly or indirectly, through subdistributors or otherwise, develop, manufacture, promote, market or distribute products that are competitive with the Products.

2. OBLIGATIONS OF DISTRIBUTOR.

     2.1 Marketing Efforts. Distributor shall have the following obligations with respect to the marketing and distribution of the Products:

(a)	To use its best efforts to further the promotion, marketing, sales, and distribution of the Products in the Territory, and to maintain adequate sales and service facilities in the Territory;
(b)	To promptly respond to all inquiries or complaints from purchasers of the Products, and to maintain and support the Products;
(c)	To provide adequate and appropriate training to its sales and support personnel, approved agents and subdistributors, and clinicians concerning the Products, and to make available such persons for training;
(d)	To provide for Restore’s approval a reasonably detailed business plan for the marketing and distribution of the Products within thirty (30) days of the Effective Date (including pricing strategies and promotional activities) and thereafter to update for Restore’s approval such business plan at least once per year;
(e)	To provide Restore with reports of Distributor’s activities, the market for the Products, customer prospects and other information regarding sales of the Products once per quarter in such detail as reasonably requested by Restore;
(f)	To provide Restore on a timely basis for each calendar quarter during the term of this Agreement a rolling quarterly forecast of orders for the Products for the next 12 months;
(g)	To prepare and print advertising and marketing materials for the Products, which materials must be approved in writing by Restore prior to their first use, as described in Section 3.1 below;
(h)	To conduct its business in a professional manner which will reflect positively upon Restore and its Products; and
(i)	To comply with all laws and regulations of the Territory.

     2.2 Minimum Purchase Requirement. Distributor agrees to purchase and take delivery of a quantity of Products that, at a minimum, meets the Minimum Purchase Requirements specified in Exhibit A. No less than three (3) months before the end of each twelve (12) month period (the first of which shall commence on the Effective Date) during the initial term hereof, and any renewal term, new Minimum Purchase Requirements shall be agreed by the parties. Distributor understands and agrees that achievement of the Minimum Purchase Requirements is of the essence of this Agreement and if at the end of the initial term or any renewal term: (a) Distributor and Restore fail to agree upon Minimum Purchase Requirements for the Products for the following year, or (b) Distributor fails to meet the Minimum Purchase Requirements, Restore, at its sole option, shall have the right to (1) terminate this Agreement pursuant to Section 9.2(c)(i) hereof with no liability to Distributor, or (2) appoint other distributors of the Products in all or part of the Territory (i.e., so that Distributor is Restore’s nonexclusive distributor of the Products in the Territory) during the remaining term of this Agreement notwithstanding any contrary terms herein.

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     2.3 Expired Products. Distributor shall not sell any Products beyond their stated expiration date.

     2.4 Returned Products Policy. All returns must be authorized in writing by Restore and an authorization number given to Distributor prior to the return of any Product, freight pre-paid. Product returned must be unopened and undamaged, and must be received within 30 days of the invoice date for full replacement or credit. Product returned after 30 days may be subject to a restocking fee. Returns after 90 days from the invoice date may not be accepted. For Product returns because of defective product or under warranty, see the warranty provision in Section 5.1.

     2.5 Reverse Engineering; Alteration of Products. Except as may be permitted by applicable law, Distributor shall not reverse engineer or disassemble the Products and shall not knowingly allow any other person to do so. Distributor shall not alter the Products or any Product packaging or labeling except with the prior written consent of Restore.

     2.6 Inventory. Distributor shall at all times maintain an inventory of the Products sufficient to meet anticipated demand but calculated to result in the minimum possible return of Products under Section 2.4.

     2.7 Governmental Requirements; Registrations. Except as otherwise agreed by Restore in writing, Distributor shall be responsible for compliance with all governmental requirements for importing the Products into the Territory, including but not limited to all customs requirements. Distributor shall obtain any necessary import licenses at its own expense. Restore shall be responsible for obtaining all governmental approvals for the Products, and Distributor shall provide Restore with assistance in obtaining all governmental approvals as Restore may reasonably request, unless the parties agree otherwise or unless otherwise required by law in the Territory. In the event that Distributor obtains the necessary registrations or approvals by agreement of the parties or because required by the law of the Territory, Distributor shall provide Restore with copies of filings and correspondence with regulatory authorities relating to the Products or such registrations or approvals and, upon termination or expiration of this Agreement, Distributor shall promptly execute and deliver all documents reasonably requested by Restore to Restore or any third party designated by Restore to transfer such registrations or approvals to Restore or its designee. If Distributor obtains such registrations or approvals in its own name without Restore’s prior written consent, Distributor agrees that such registrations and approvals shall be the property of Restore and Distributor shall cooperate as requested by Restore in connection therewith.

     2.8 Product Claims. Distributor shall make no representations, warranties or other claims concerning the Products except as authorized by Restore in writing or as are contained in any of Restore’s marketing materials that may be provided to Distributor. Without prior written consent of Restore, no studies concerning the Products conducted by or for Distributor shall be deemed clinical studies of the Products or shall be used to market or promote the Products. Restore shall be the sole owner of, and Distributor hereby assigns to Restore all right, title and interest in, the Products and any information or data concerning the Products that result from such studies or clinical trials. Distributor shall take any actions and execute any documents requested by Restore to perfect Restore’s ownership rights in such information or data.

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     2.9 Notice of Intellectual Property Infringement. Distributor shall promptly notify Restore in writing of any patent, copyright infringement or unauthorized use of Restore’s trade secrets in the Territory. Restore reserves the right in its sole discretion to institute any proceedings against such third party infringers, and Distributor shall refrain from doing so. Distributor shall cooperate fully with Restore in any legal action taken by Restore against such third parties, provided that Restore shall pay all expenses of such action and all damages which may be awarded or agreed upon in settlement of such action shall accrue to Restore.

     2.10 Laws of the Territory. Distributor shall promptly inform Restore of any legal requirements in the Territory relating to the use or distribution of the Products, marketing materials or Product packaging and labeling.

     2.11 Insurance. Distributor shall maintain in force, during the term of this Agreement and for as long thereafter as a practical need exists, one or more policies of liability insurance with an insurer reasonably acceptable to Restore which shall cover all liabilities of Distributor, whenever arising, attributable to the Products and in an amount of at least One Million Dollars ($1,000,000). Restore shall be designated as an additional named insured under each such policy and shall be provided with a certificate of insurance within thirty (30) days after the issuance and each renewal thereof.

     2.12 Adverse Reactions. Distributor shall advise Restore within twenty four (24) hours of any adverse reaction, injury or death resulting from any use of the Products (“Adverse Reaction”) of which it becomes aware. Distributor shall also, within five (5) days thereafter, provide Restore with a written report stating the full facts known to it about the Adverse Reaction, including but not limited to customer name, address, telephone number and Product, lot or serial number. Restore shall from time to time provide Distributor with written procedures regarding the information required by Restore in the event of any Adverse Reaction. At all times during the term of this Agreement, Distributor shall have appropriate written procedures established for processing any Adverse Reaction, and shall provide the same to Restore upon request. As part of such procedures, Distributor shall establish a means for properly (a) tracking delivery of Products to customers (including all customers who receive Products from subdistributors), including, without limitation, tracking which customers have received Products from particular lot numbers, and (b) maintaining its distribution records for the Products for a reasonable time period. All information related to any Adverse Reaction shall be the Confidential Information of Restore, and shall not be disclosed by Distributor to any third party or used by Distributor except as required by applicable laws.

     2.13 Distributor Expenses. Distributor assumes full responsibility for all its own costs and expenses incurred in carrying out its obligations under this Agreement, including but not limited to all rents, salaries, commissions, and advertising, demonstration, travel and accommodation expenses.

     2.14 Product Recalls.

(a) Notification. If either party believes that a recall of any Products in the Territory is desirable or required by law in the Territory or elsewhere, it shall immediately notify the other party. The parties shall then discuss reasonably and in good faith

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	whether such recall is appropriate or required and the manner in which any mutually agreed recall shall be handled. This Section 2.14 shall not limit the obligations of either party under law with respect to recall of Products required by law or properly mandated by any governmental authority.
(b)	Corrective Action. If any governmental agency having jurisdiction in the U.S. or the Territory shall request or order any corrective action with respect to Products supplied hereunder, including any Product recall, customer notice, restriction, change, corrective action or market action or any Product change, the parties shall cooperate fully to effectuate such corrective action.
(c)	Correspondence. Each party shall promptly provide the other with copies of correspondence to or from governmental authorities relating to corrective action in the Territory concerning the Products.
(d)	Records, Adverse Event Reports and Recalls. Distributor shall maintain complete and accurate records of all Products imported into and resold by Distributor in the Territory, which records may be examined at any time by Restore upon reasonable notice to Distributor.

     2.15 Personnel.

(a)

Distributor shall employ or retain an adequate organization of well-trained and qualified personnel to effectively perform its obligations under this Agreement in the Territory.

(b)

Distributor shall comply fully with its obligations under labor, tax, social welfare and other laws relating to its personnel. In addition, Distributor undertakes that it shall not knowingly hire any personnel in violation of any restrictive covenants contained in any agreement with a third party or any other obligations owed to any third party, and Distributor shall procure that none of its subdistributors, agents, officers, directors, employees or representatives shall do so. Distributor shall also assure that any and all subdistributors, agents, officers, directors, employees or representatives engaged or employed by it are not subject to any such obligations.

3. OBLIGATIONS OF RESTORE

     3.1 Sales and Technical Literature. Restore shall provide to Distributor reasonable quantities of such sales and technical literature and materials as Restore may have prepared and shall make available copies of promotional artwork it may have prepared. At its option, Restore may provide the same to Distributor in electronic format. Distributor shall use such materials solely as provided under this Agreement. Distributor shall not alter such materials or use any other materials in connection with the marketing and distribution of Products hereunder without Restore’s prior written consent. Notwithstanding the above, Distributor shall translate all materials into the language or languages required by law or appropriate to the Territory, and shall provide Restore with copies of such translations for approval prior to their first use. Restore retains all right, title and interest in and to such materials and to all translated versions thereof.

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     3.2 Marketing and Technical Support. Restore will provide Distributor with such other marketing support as the parties may mutually agree, including providing training with respect to the Products to Distributor’s employees at Distributor’s expense.

     3.3 Export of Products. Restore shall be responsible for obtaining U.S. export licenses for the Products. Distributor shall cooperate with Restore with respect to export licenses, including supplying Restore on a timely basis with such information and documentation as Restore shall request in connection therewith.

     3.4 Special Programs. Restore may, in its sole discretion from time to time during the term of this Agreement, offer to Distributor certain promotional items related to the Products and discounts from the then-current prices for the Products, in order to support certain time- and volume-limited promotional and sales programs instituted by Restore. Special programs offered by Restore as of the Effective Date are set forth in Exhibit C, which may be modified by Restore from time to time during the term of this Agreement upon notice to Distributor. In no event shall Restore be obligated to offer, or continue to offer, any special programs under this Agreement.

4. PURCHASES AND PAYMENT TERMS

     4.1 Orders. Distributor shall submit orders pursuant to Restore procedures as communicated to Distributor from time to time. Distributor shall confirm all oral orders in writing (preferably by e-mail or facsimile). All orders from Distributor are subject to acceptance in writing by Restore, which acceptance may be delivered by reply e-mail or facsimile. No accepted order may be modified or canceled except as agreed in writing by the parties. Distributor’s orders or mutually agreed change orders shall be subject to all provisions of this Agreement. Any terms or conditions of such order or change order which conflict with the terms or conditions of this Agreement shall be deemed excluded.

     4.2 Fulfillment of Orders. Distributor’s purchase orders shall include shipping instructions and shipping address and, if applicable, any relevant export control information or documentation to enable Restore to comply with applicable U.S. export control laws. Restore shall use its best efforts to fill orders that are within Distributor’s forecast within fourteen (14) business days. Restore shall use reasonable efforts to fill orders to the extent they exceed Distributor’s forecast.

     4.3 Delivery Terms. Distributor shall insure each shipment of the Products with a reputable insurer for the full invoice price of such shipment. Such insurance shall provide for coverage from delivery of the Products at the Free Carrier point, Restore’s facility in St. Paul, Minnesota, U.S.A.

     4.4 Acceptance of Products. In the event of any shortage, damage or discrepancy in or to a shipment of Products, Distributor shall promptly report the same to Restore and furnish such written evidence or other documentation as Restore may deem appropriate. Restore shall not be liable for any such shortage, damage or discrepancy unless Restore has received notice and evidence thereof from Distributor within ten (10) days after delivery of the Products. If such evidence demonstrates to Restore’s satisfaction that Restore is responsible for such shortage, damage or discrepancy, Restore shall promptly deliver additional or substitute Products to

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Distributor, but in no event shall Restore be liable for any additional costs, expenses or damages incurred by Distributor directly or indirectly as a result of such shortage, damage or discrepancy in or to a shipment. Distributor shall return any excess or damaged Products as directed by Restore.

     4.5 Prices. Distributor shall pay Restore the prices for the Products as listed in Exhibit B hereto. Restore may increase its prices for the Products upon one hundred eighty (180) days written notice. Increased prices shall not apply to any purchase order accepted prior to the effective date of the price increase unless the order provides for delivery more than one hundred twenty (120) days after acceptance of the order. Prices are quoted in U.S. dollars, and include charges for freight and insurance. Taxes, duties and the like shall be the sole responsibility of Distributor. Any special packing or handling requested by Distributor shall be at the sole expense of Distributor.

     4.6 Payment Terms. Subject to credit review and credit limits which may be established by Restore in its sole discretion, payment for each shipment shall be paid within sixty (60) days of receipt of Restore’s invoice by wire transfer or check drawn on a U.S. bank designated by Restore. All payments shall be made in U.S. dollars. Any overdue payment from Distributor to Restore under this Agreement shall accrue interest at the lesser of one and one-half percent (1.5%) per month or the highest rate permitted under applicable law. Restore shall have the right to recover its collection costs and expenses (including attorneys’ fees) for late payments. Restore reserves the right to withhold or suspend shipment of Products if there is any overdue balance owed by Distributor to Restore and to modify the payment terms set forth in this Section 4.6.

     4.7 Resale Prices. Distributor may offer the Products in the Territory at such prices as Distributor, in its sole discretion, shall determine.

     4.8 Product Changes. Restore may do the following upon written notice and without liability to Distributor:

(a)	Discontinue the sale of one or more Products; or
(b)	Commence the development and distribution of new products or of modifications or improvements to the Products having features which may make the Products wholly or partially obsolete, whether or not Distributor is granted any distribution rights in respect of such new or modified products.

     4.9 Net Payments. All payments to be made by Distributor to Restore pursuant to this Agreement represent net amounts Restore is entitled to receive and shall not be subject to any deductions for any reason whatsoever, including duties, assessments, taxes and bank charges.

5. WARRANTY; LIMITATION OF DAMAGES

     5.1 Limited Warranty. Restore warrants that the Products will conform to the then-current specifications published by Restore for a period of ninety (90) days after delivery thereof to Distributor under this Agreement. The foregoing warranty, or such other warranty of which Restore may notify Distributor in writing from time to time, is the sole and exclusive warranty

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made by Restore relating to the Products. Distributor agrees that it alone shall be liable, to the exclusion of Restore, for the breach of any other warranty given by Distributor to its customers or others regarding the Products. Restore’s obligation in the event of a breach of Restore’s warranty shall be limited replacement of the relevant Product. Distributor shall cooperate with Restore to provide such remedies to purchasers of the Products in the Territory. THE LIMITED WARRANTY SET FORTH IN THIS SECTION 5.1, OR ANY SUCCESSOR WARRANTY, IS IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, WHICH ARE HEREBY DISCLAIMED, INCLUDING WITHOUT LIMITATION ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE.

     5.2 Limitation of Damages. RESTORE SHALL NOT BE LIABLE TO DISTRIBUTOR OR ANY THIRD PARTY FOR ANY LOSS OR DAMAGE CAUSED BY DELAY IN FURNISHING THE PRODUCTS UNDER THIS AGREEMENT OR ANY OTHER PERFORMANCE UNDER THIS AGREEMENT. NEITHER PARTY SHALL HAVE ANY LIABILITY OF ANY KIND TO THE OTHER PARTY OR ANY THIRD PARTY FOR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL LOSSES OR DAMAGES, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH POTENTIAL LOSS OR DAMAGE BY THE OTHER PARTY OR ANY THIRD PARTY. IN NO EVENT SHALL RESTORE BE LIABLE FOR ANY DAMAGES IN EXCESS OF THE AGGREGATE AMOUNTS ACTUALLY PAID BY DISTRIBUTOR TO RESTORE UNDER THIS AGREEMENT.

6. INDEMNIFICATION

     6.1 Indemnification by Restore. Restore hereby agrees to indemnify, defend and hold Distributor harmless from any damages awarded against Distributor (including, without limitation, reasonable costs and legal fees thereby incurred by Distributor) arising out of any suit, claim or other legal action (“Legal Action”) brought by a third party that alleges the Products, or any of them, infringe any United States patent, copyright, or trade secret. If a Product is found to infringe any such third party intellectual property right in such a Legal Action, at Restore’s sole discretion and expense, Restore may (a) obtain a license from such third party for the benefit of Distributor; (b) replace or modify the Product so that it is no longer infringing; or (c), if neither of the foregoing is commercially feasible, terminate this Agreement with no further liability to Distributor.

     6.2 Indemnification by Distributor. Distributor hereby agrees to indemnify, defend and hold Restore harmless from any damages, costs or liabilities (including, without limitation, any reasonable costs or legal fees thereby incurred by Restore) arising out of any Legal Action that arises from or results out of the marketing, distribution or sale of the Products by Distributor, including, without limitation, (a) any act or omission by Distributor or any of its subdistributors or agents; (b) any unfair business practice of Distributor or any of its subdistributors or agents; or (c) any violation by Distributor or any of its subdistributors or agents of any law, regulation or order of the Territory.

     6.3 Indemnification Procedure. A party seeking indemnification (an “indemnified party”) shall give the other party (an “indemnifying party”) written notice of any Legal Action within ten (10) days of first knowledge thereof. The indemnifying party shall have sole and

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exclusive control of the defense of any Legal Action, including the choice and direction of legal counsel. The indemnified party shall have the right to engage its own counsel, at its own expense. The indemnified party may not settle or compromise any Legal Action without the written consent of the indemnifying party.

7. CONFIDENTIALITY

     7.1 Confidential Information; Term. All Confidential Information (as defined below) shall be deemed confidential and proprietary to the disclosing party. Each party may use the Confidential Information disclosed by the other party during the term of this Agreement only as permitted or required for its performance hereunder. Neither party shall disclose or provide any Confidential Information of the other party to any third party and shall take reasonable measures to prevent any unauthorized disclosure by its employees, agents, contractors, consultants or permitted subdistributors, including appropriate individual nondisclosure agreements. The foregoing duty shall survive for five (5) years after any termination or expiration of this Agreement.

     7.2 Definition. As used in this Agreement, the term “Confidential Information” shall mean all information disclosed by Restore to Distributor, or by Distributor to Restore, including without limitation customer lists, information that is embodied in the Products, or any information regardless of the form in which it is disclosed that relates to a party’s markets, customers, products, patents, inventions, procedures, methods, designs, strategies, plans, assets, liabilities, prices, costs, revenues, profits, organization, employees, agents, resellers or business in general. The following shall not be considered Confidential Information for purposes of this Article 7:

(a)	Information which is or becomes in the public domain through no fault or act of the receiving party;
(b)	Information which was independently developed by the receiving party without the use of or reliance on Confidential Information of the other party;
(c)	Information which was provided to the receiving party by a third party under no duty of confidentiality to the disclosing party; or
(d)	Information which is required to be disclosed by law, provided, however, prompt prior notice thereof shall be given to the disclosing party and disclosure shall be limited to the maximum extent possible.

8. TRADEMARKS

     8.1 Use of Trademarks. Subject to the terms and conditions of this Agreement, Restore hereby grants to Distributor, and Distributor hereby accepts from Restore, a nonexclusive, nontransferable license to use the Restore trademarks specified in Exhibit A hereto, as the same may be revised by Restore from time to time, during the term of this Agreement, solely in connection with the distribution, promotion and advertising of the Products in the Territory, and solely in accordance with Restore’s standards and instructions. Distributor may use the Restore trademarks in promotional brochures and in connection with trade fairs only

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with Restore’s prior written consent. Distributor shall not use any other marks or trade names in connection with the marketing and distribution of the Products. Restore may inspect and monitor Distributor’s use of the Restore trademarks. Distributor shall not remove or alter any Restore trade names, trademarks, copyright notices, catalogue and lot numbers, labels, tags or other identifying marks, symbols or legends affixed to any Products, documentation or containers or packages. Distributor shall not adopt, use or register any words, phrases or symbols which are identical to or confusingly similar to any of Restore’s trademarks.

     8.2 Ownership. Distributor acknowledges and agrees that Restore is the owner of all rights in the Restore trademarks, that all use of the Restore trademarks by Distributor shall inure to the benefit of Restore, that Distributor will not take any action which is inconsistent with Restore’s ownership of the Restore trademarks and that, upon termination of this Agreement, all rights in the Restore trademarks, including the goodwill connected therewith, shall remain the property of Restore.

     8.3 Registration and Enforcement. Restore shall be solely responsible for, and may exercise its sole discretion in, deciding whether to apply for and prosecute applications for registration of the Restore trademarks in any jurisdiction and whether to maintain any such registrations therefor. Distributor shall give Restore immediate notice in writing of any infringement or threatened infringement of the Restore trademarks of which Distributor becomes aware. In any such case, Restore shall have complete discretion whether to institute proceedings for infringement of the Restore trademarks and complete discretion and control over such proceedings, and Distributor shall cooperate fully with Restore in any such proceedings with such third parties, provided that Restore shall pay all expenses of such action and all damages which may be awarded or agreed upon in settlement of such proceedings shall accrue to Restore.

9. TERM AND TERMINATION

     9.1 Term. This Agreement shall take effect on the Effective Date and shall continue for an initial term of three (3) years, unless terminated earlier pursuant to the terms of this Article 9. This Agreement may be renewed for additional one (1) year extensions after the expiration of its initial term upon mutual written agreement of the parties. If such renewal has not been agreed to by the parties in writing at least three (3) months prior the end of the initial or any renewal term, then this Agreement shall terminate at the end such term and Restore shall immediately be free to make other arrangements regarding the future distribution and sale of the Products in the Territory.

     9.2 Termination. This Agreement may be terminated prior to expiration as follows:

(a)

Either party may terminate this Agreement with written notice to the other party if the other party files a petition of any type as to its bankruptcy, is declared bankrupt, becomes insolvent, makes an assignment for the benefit of creditors, goes into liquidation or receivership, otherwise loses legal control of its business involuntarily, or discontinues its business operations related to this Agreement.

(b)

Either party may terminate this Agreement if the other party is in material breach of this Agreement (including but not limited to Distributor’s failure to pay

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	promptly sums owing to Restore or Distributor’s breach of Section 1.3) and has failed to cure such breach within thirty (30) days of receipt of written notice thereof from the first party.
(c)	Restore may terminate this Agreement immediately upon written notice to Distributor if:

(i)	Distributor has failed to meet the applicable Minimum Purchase Requirements for the Products, as set forth in Exhibit A, in any particular contract year, or the parties have not agreed upon the Minimum Purchase Requirements for the Products for any particular year as provided in Section 2.2;
(ii)	an act or omission of Distributor or Distributor’s employees, officers, subdistributors or agents is likely, in the sole discretion of Restore, to cause or has caused harm or disrepute to the reputation of Restore or the Products, or harm to the public;
(iii)	there is a material change in the management of or operation of Distributor’s business, or any change in the ownership (including ownership of shares of Distributor) or control of Distributor;
(iv)	Distributor breaches any obligation regarding Restore’s intellectual property, alters any Product or the labeling therefor without Restore’s prior written consent or sells a Product beyond its expiration date; or
(v)	in the sole opinion of Restore, any law or government-enacted regulation or decree renders the performance by either party of its respective obligations hereunder unduly onerous or otherwise inexpedient; or
(vi)	Restore ceases to sell the Products.

(d)	Either party may terminate this Agreement immediately upon written notice to the other party if an event of force majeure (as described in Section 11.2 below), which affects the performance of the other party, continues for more than six (6) months.
(e)	Either party may terminate this Agreement with sixty (60) days prior written notice to the other party if this Agreement is assigned by the other party as a result of a merger, acquisition, or sale of all or substantially all of the assets of the other party, and the first party does not consent to such assignment, which consent will not be unreasonably withheld.

     9.3 Partial Termination. In the event that Restore shall have the right pursuant to the provisions of Section 9.2 to terminate this Agreement in its entirety, Restore may elect, in its sole discretion, to terminate this Agreement solely as it applies to any portion of the Territory.

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     9.4 Rights and Obligations on Termination. In the event of termination of this Agreement for any reason, the parties shall have the following rights and obligations:

(a)	Neither party shall be released from the obligation to make payment of all amounts then or thereafter due and payable;
(b)	The following Sections and Articles shall survive any termination or expiration of this Agreement: Sections 1.2 (but only to the extent Distributor is obligated to indemnify Restore), 2.3, 2.5, 2.7, 2.8, 2.11, 2.13, 8.3, and Articles 5, 6, 7, 9, 10 and 11;
(c)	Distributor shall cease to distribute the Products and shall return to Restore, at Distributor’s expense, all copies of promotional and technical materials and artwork provided by Restore;
(d)	Restore may, at its option, repurchase Distributor’s inventory of non-obsolete and nonexpired Products at the price paid by Distributor for such Products or direct Distributor to sell them to the third party or parties selected by Restore;
(e)	Each party shall return or, if requested by the other party, destroy all Confidential Information of the other party, including, if applicable, all electronic copies thereof and shall certify in writing that it has done so; and
(f)	Upon the effective date of termination or expiration of this Agreement, Distributor shall immediately cease any use of the Restore trademarks in any manner, or any confusingly similar imitation thereof, and shall destroy all packaging, advertising material, labels and other printed materials bearing the Restore trademarks. In addition, Distributor hereby empowers Restore and shall assist Restore, if requested, to cancel, revoke or withdraw any governmental registration or authorization permitting Distributor to use Restore trademarks in the Territory.

     9.5 No Compensation. In the event of any expiration or termination of this Agreement for any reason, neither party shall owe any compensation to the other party for lost profits, lost opportunities, goodwill, or any other loss or damage as a result of or arising from such termination or expiration. Distributor acknowledges that Restore may terminate this Agreement in the manner provided in this Article 9, that Distributor has not paid any consideration for the right to act as Restore’s distributor in the Territory, and that Restore has agreed to enter into this Agreement on the express condition that Distributor will not be entitled to any compensation for its termination or non-renewal.

10. ARBITRATION

     10.1 Litigation Rights Reserved. If any dispute arises with respect to the unauthorized use of Confidential Information, Restore’s trademarks or other intellectual property of Restore by Distributor, or with respect to acts or omissions of Distributor relating to the Products which in the judgment of Restore, negatively impact the reputation of Restore or the Products or the

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safety of the public, the aggrieved party may seek any available remedy at law or equity from a court of competent jurisdiction, in addition to its right to arbitration as provided in Section 10.2.

     10.2 Arbitration. Except as provided in Section 10.1 above, any dispute, claim or controversy which shall arise out of or in relation to this Agreement, or the breach thereof, shall be finally settled by binding arbitration at Minneapolis, Minnesota, U.S.A. in accordance with the International Arbitration Rules of the American Arbitration Association (“AAA”). Any such arbitration shall be conducted by three (3) arbitrators appointed by mutual agreement of the parties or, failing such agreement, in accordance with the AAA rules. At least one (1) arbitrator shall be an experienced biomedical device professional, and at least one (1) arbitrator shall be an experienced business attorney with background in the licensing and distribution of biomedical devices. The arbitration shall be conducted in the English language. Notwithstanding any contrary provisions in the AAA rules, each party shall bear its own costs and expenses of the arbitration and one-half (1/2) of the fees and costs for the arbitrator unless the arbitrator determines the fees and costs should be borne by one of the parties. The arbitrator may not award or assess punitive damages against either party.

     10.3 Governing Law. This Agreement shall be construed and interpreted in English. This Agreement shall also be governed by, and interpreted and construed in accordance with, the laws of the State of Minnesota, U.S.A., excluding its choice of law rules and the United Nations Convention on the International Sale of Goods, provided that enforcement and operation of the arbitration agreement contained in Section 10.2 hereof, and the enforcement of any award rendered pursuant thereto, shall be governed by United States federal law to the exclusion of State law.

11. MISCELLANEOUS

     11.1 Compliance with Laws. Distributor shall comply with all applicable laws affecting this Agreement and its performance hereunder, including, without limitation, the U.S. Foreign Corrupt Practices Act, and any restrictions on the export of the Products under the U.S. Export Administration Regulations. Without limiting the generality of the foregoing sentence, Distributor shall maintain all registrations with governmental agencies, commercial registries, chambers of commerce, or other offices which may be required under local law in order to enable it lawfully to conduct its business and perform its obligations under this Agreement. Upon written notice from Restore, Distributor shall provide such information as Restore shall reasonably consider necessary to verify compliance by Distributor with the provisions of this Section 11.1.

     11.2 Force Majeure. If the performance of this Agreement or any obligation hereunder (other than the payment of monies due owing hereunder) is prevented, restricted or interfered with by reason of any event or condition beyond the reasonable control of such party (including without limitation acts of state or governmental action, riots, disturbance, war, strikes, lockouts, slowdowns, prolonged shortage of energy or other supplies, epidemics, fire, flood, hurricane, typhoon, earthquake, lightning and explosion, or any refusal or failure of any governmental authority to grant any export license legally required), the party so affected shall be excused from such performance, only for so long as and to the extent that such a force prevents, restricts or

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interferes with the party’s performance and provided that the party affected gives notice thereof to the other party and uses diligent efforts to remedy such event or conditions.

     11.3 Relationship. This Agreement does not make either party the employee, agent or legal representative of the other for any purpose whatsoever. Neither party is granted any right or authority to assume or to create any obligation or responsibility, express or implied, on behalf of or in the name of the other party. Each party is acting as an independent contractor.

     11.4 Assignment. Distributor shall not have the right to assign or otherwise transfer its rights and obligations under this Agreement except with the prior written consent of Restore. Any prohibited assignment shall be null and void. This Agreement will be binding on the parties hereto and their successors and permitted assignees.

     11.5 Notices. Notices permitted or required to be given hereunder shall be given to the parties at the addresses set forth below or such other address of which a party may notify the other party in writing,:

To Restore:	Restore Medical, Inc.
	2800 Patton Road
	Roseville, MN 55113 USA
	Fax: 651-634-3025 Attention: Sr. VP of Commercial Operations
To Distributor:	Sonomed Ltd Hatizmoret Str. 40/42 Rishon Le Zion, 75562, Israel Fax: +972 3 9515490 Attention: Shimon Aharon

Notices shall be deemed sufficient if given by (a) registered or certified mail, postage prepaid, return receipt requested, (b) private courier service, or (c) facsimile with electronic confirmation of receipt, addressed to the respective addresses of the parties as first above written or at such other addresses as the respective parties may designate by like notice from time to time. Notices so given shall be effective upon (1) receipt by the party to which notice is given, or (2) on the fifth (5th) day following domestic mailing or the tenth (10th) day following international mailing, as may be the case, whichever occurs first.

     11.6 Entire Agreement. This Agreement, including the Exhibits hereto which are incorporated herein, constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes all proposals, oral or written, and all negotiations, conversations, discussions or previous distribution agreements or arrangements heretofore between the parties. Distributor hereby acknowledges that it has not been induced to enter into this Agreement by any representations or statements, oral or written, not expressly contained herein.

     11.7 Amendment. This Agreement may not be modified, amended, rescinded, canceled or waived, in whole or in part, except by written amendment signed by both parties.

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     11.8 Severability. If any provision of this Agreement is found unenforceable under any of the laws or regulations applicable thereto, such provision terms shall be deemed stricken from this Agreement, but such invalidity or unenforceability shall not invalidate any of the other provisions of this Agreement.

     11.9 Counterparts. This Agreement may be executed in two or more counterparts in the English language, and each such counterpart shall be deemed an original hereof. In case of any conflict between the English version and any translated version of this Agreement, the English version shall govern.

     11.10 Waiver. No failure by either party to take any action or assert any right hereunder shall be deemed to be a waiver of such right in the event of the continuation or repetition of the circumstances giving rise to such right.

[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

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     IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives below.

Restore Medical, Inc.		Sonomed, Ltd.
By	/s/ Susan L. Critzer	By	/s/ Aharon Shimon
Name: Susan L. Critzer		Name: Aharon Shimon
Title: President & CEO		Title: General Manager

Exhibit List
A	Territory, Products, Minimum Purchase Requirements, Trademarks
B	Pricing and Special Programs
C	Special Programs

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EXHIBIT A

Territory:

Israel

Products:

Distributor may purchase and resell the following RMI products:

Pillar^® Palatal Implant System (Part Numbers PDS-1000,PDS-2000, PDS-3000, or PDS-4000)

Restore Trademarks:

Minimum Purchase Requirements:

Distributor agrees to purchase and take delivery of a minimum of one thousand (1000) Products (net of returns) during the first twelve (12) month period of this Agreement, which shall be purchased by Distributor in the following increments: (a) two hundred fifty (250) Products no later than thirty (30) days after approval of the Product by the appropriate authorities in the Territory (the “Initial Order”); (b) two hundred fifty (250) Products by the earlier of                                         , or one hundred twenty (120) days after receipt of the Initial Order by Restore; (c) two hundred fifty (250) Products by the earlier of                                         , or two hundred ten (210) days after receipt of the Initial Order by Restore; and (d) two hundred fifty (250) Products by the earlier of                                          or three hundred (300) days after receipt of the Initial Order by Restore.

EXHIBIT B

PRICING

	Product Number	Each Price
One Each	PDS-1000, 2000, 3000, or 4000	$115 ea up to 1000 devices purchased within first year and $105 each for all devices over 1000 purchased in first year
		In year 2, $125 each

EXHIBIT C

SPECIAL PROGRAMS

1. Practice Introduction Program:

The Practice introduction program provides distributors the ability to offer no-charge product to physicians during the practice introduction process. Restore Medical will credit the Distributor for 50% of the cost of up to 9 devices per physician who is trained using the program and for whom no-charge product was offered. A Practice Introduction Form (see attachment I) must be completed by the implanting physician and provided to Restore Medical to receive credit. All forms will be processed quarterly and credits applied to the Distributor’s account within 30 days of receipt and verification of all documentation.

2. Product Replacement Program:

Restore Medical will provide one-for-one replacement product to the Distributor upon notification with documentation by an implanting physician that an implant had to be removed and replaced.

3. Demonstration Product Program:

Restore Medical will provide the Distributor an initial supply of twenty-five (25) not-for-sale, not-for-human use demonstration devices and 100 individual implants. Additional demonstration devices will be made available as necessary and as agreed upon by Restore Medical and the Distributor.

ATTACHMENT I TO EXHIBIT C

Practice Introduction

Date Distributor

Physician Name
	(first, last)

Address

Number of Patients Treated	Snoring	OSA
Number of Implants Used
Lot Number (s)

Thank you for evaluating the Pillar Palatal Implant product. Please sign below to confirm you have used the number of no-charge implants, as indicated above.

Physician Signature:

EX-10.14

Exhibit 10.14

Pi Medical, Inc.
Research and Development Agreement

This Agreement is made effective the 11^th day of August, 2000 by and between Pi Medical, Inc., (“Pi Medical”) a Minnesota corporation, whose principal place of business is 2800 Patton Road, St. Paul, MN 55113, and Advanced Composites Industries, Inc., 3620 Horizon Drive, King of Prussia, PA 19072 (“ACI”). In consideration of the mutual covenants and promises set forth herein, the parties hereby agree as follows:

1. Term: Unless terminated as hereafter provided, this Agreement shall begin on the above effective date and end on October 15, 2000 unless earlier terminated below. The parties may negotiate one or more renewals of this Agreement.

2. Relation to Other Agreements: An earlier agreement and Exhibit A between the parties dated July 5, 2000 calling for 5,000 units of 3-D Braided Pi Medical Devices (“Manufacturing Agreement”) is suspended herewith. The parties intend that a product specification arising from this Agreement with then be a substitute specification for the Manufacturing Agreement.

3. Duties: Duties will be assigned by Pi Medical and will involve consulting in the area of device design and development for use in snoring or sleep apnea treatment and manufacturing of such product. As part of these duties, ACI will use its best efforts to design and produce prototype 3-D braided structures in accordance with Pi Medical Design Specifications (PMDSs). ACI will focus initially on PMDSs #100018-600 and #100018-700. Other designs may include round structures such as PMDSs #100018-300, 400, 500, 800 and/or other more complex structures as mutually determined by Pi Medical and ACI. The number of designs and prototypes produced under this program will depend on the PMDSs selected. As such, this program is based on a two month level of effort by ACI, rather than a guaranteed number of designs and prototypes delivered. ACI currently projects each design and prototype iteration of PMDSs #100018-300 through 800 to last about 8 days, with 2 — 3 days of design and 5 — 6 days of prototyping. More complex structures will take longer to design and prototype. These projections do not include lead times for procuring materials and other items such as yarns, monofilaments, carriers, dies, etc.

4. Compensation:

A. This contract will be performed by ACI on a time and materials basis with a fixed (%) fee. ACI will bill Pi Medical for the actual time spent and actual materials, subcontracts, ACIs, travel, shipping and other direct costs purchased on this program by ACI plus a fixed fee.

Page 1 of 4

B. ACI will bill Pi Medical based on the following Labor Categories and Labor Rates:

Labor Category	Labor Rate
Program Management	$172.50	/hr.
Senior Design Engineer	$172.50	/hr.
Manufacturing Engineer	$  51.75	/hr.
Manufacturing Technician	$  46.00	/hr.

C. Based on the above Effective Dates, Costs, required Level of Effort for PMDSs 1000 18-300 through 800, and a limited materials and other direct costs requirement, ACI currently projects this program to have a total value of about $70,000.00.

5. Termination: Pi Medical may terminate this Agreement prior to the conclusion date but shall remain liable for all costs and fixed fee incurred up to the date of termination.

6. Authority: ACI shall not have the right to bind Pi Medical or commit Pi Medical to any agreement or understanding with any third party whatsoever.

7. Confidential Information: Because of the confidential nature of the information which will be disclosed to ACI under this Agreement, ACI will not, except as authorized by Pi Medical, disclose such confidential information to any other third party or company. The obligation of confidentiality shall not be applicable with respect to such information which: (A) was known to ACI prior to disclosure, (B) is or becomes known to the public by general publication without violation of this Agreement, (C) is given to ACI by a third party having a right to do so, or (D) is independently developed by ACI without the use of information supplied by Pi Medical under this Agreement.

8. Exclusivity: Because of the confidential nature of the information, which will be disclosed to ACI under this Agreement, ACI will not do any other consulting, research or development work in the area of snoring treatment involving an implant to stiffen the soft palate without prior approval by Pi Medical during the duration of this Agreement and for one year thereafter.

9. Ownership of Inventions and Patents:

A. Pi Medical Ownership

     If any patentable inventions result from performance of this Agreement, all rights under any patents that may issue on those inventions shall belong exclusively to Pi Medical. ACI hereby assigns and agrees to assign in the future all such inventions to Pi Medical without further payment from Pi Medical. ACI also agrees that, upon Pi Medical’s request and at Pi Medical’s expense, he/she would provide reasonable assistance to Pi Medical in prosecuting patents covering those inventions. All information, including copyrights, developed by ACI under this Agreement shall belong to Pi Medical and all copyrightable works are works made for hire and ACI hereby assigns and agrees to assign to Pi Medical such rights now and in the future. The

Page 2 of 4

obligations to assign inventions and copyrights to Pi Medical shall not apply to any invention or copyright for which no equipment, supplies, facility or trade secret information of Pi Medical was used and which was developed entirely on the ACI’s own time, and (1) which does not relate (a) directly to the business of Pi Medical or (b) to Pi Medical’s actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by the ACI for Pi Medical.

B. Grant Back to ACI

     Pi Medical grants ACI a paid-up, non-exclusive license to make, use or sell an invention of paragraph 9.A., above, only to the extent any final or intermediate use of such invention by ACI or any customer or end-user is limited to a field of use not including treatment of snoring, sleep apnea, sleep or breathing disorder or any implant for stiffening tissue for use in the nasal, oral or pharyngeal regions.

10. Notices: All notices required or permitted by this Agreement shall be in writing and shall be delivered in person or sent by certified or registered mail, return receipt required, postage paid to the addresses stated above or to other’s address as either party may designate. All mailing notices shall be deemed effective upon depositing in the mail.

11. Waiver: The waiver of either party of a breach of any provision of this Agreement shall not operate as or be construed as a continuing waiver or as a consent to or waiver of such subsequent breach.

12. Modification: This Agreement may only be modified in writing signed by both parties.

13. Non-assignable: Since the services to be provided under this Agreement are personal, all duties to be executed by ACI shall be performed by ACI and may not be assigned or delegated without written consent of Pi Medical.

14. Entire Agreement: This Agreement constitutes the entire Agreement between the parties with respect to the subject matter hereof and supersedes all previous agreements and understandings rather oral or written between the parties with respect to the subject hereof.

15. Governing Law: This Agreement shall be governed by the laws of the State of Minnesota.

Page 3 of 4

     In witness thereof, the parties have set forth their hand hither and to on the date indicated below.

PI MEDICAL, INC.		ADVANCED COMPOSITES
		INDUSTRIES, INC.
By:	/s/ Timothy R. Conrad	By:	/s/ George C.H. Chou
Printed Name: Timothy R. Conrad		Printed Name: George C.H. Chou
Title: Vice President		Title: President
Date: August 29, 2000		Date: August 21, 2000

Page 4 of 4

May 17, 2002

George Chou
Advanced Composites Industries, Inc. 3620 Horizon Dr.
King of Prussia, PA 19046

SUBJECT: Closing out August 1, 2001 Contract

George,

After reviewing the correspondence related to the last several lots of implants shipped against the August 1, 2001 contract, it appears that we are not in agreement on the “accept/reject” status of those units.

Our position is that the returned units do not meet the requirements of Pi Medical drawing numbers 400005 and 100029 as required in the August 1, 2001 contract. Your correspondence with us indicates that you disagree with this position.

It appears that this issue will not be resolved in the short-term. Rather than continue to debate the issue, we would like to propose the following so that we may close out the August 1, 2001 contract:

– Return the “rejected” lots to Pi Medical.

– Pi Medical will complete the final payment for the August 1, 2001 contract.

– Pi Medical will absorb any costs associated with reduced production yields from these lots.

– ACI will not bill Pi Medical for any costs associated with investigating this issue.

At this time, we do not have an immediate need for additional implants or development work. No additional work should be performed at ACI until a new contract is signed.

Acceptance of the final payment is confirmation that all obligations of the August 1, 2001 contract have been met. If you have any questions, please contact me at 651-634-3062.

Sincerely,

John Sopp

Cc:	Terry O’Brien
	Sue Critzer
	Anja Metzger
	Shannon Witkowski

PI MEDICAL, INC.

AMENDMENT TO AGREEMENT

     This Amendment amends an agreement dated the 1^st day of August, 2001 (the “Original Agreement”) by and between Pi Medical, Inc. (“Pi Medical”), a Minnesota corporation, whose principal place of business is 2800 Patton Road, St. Paul, MN 55113, and Advanced Composite Industries, Inc. (“ACT”) whose address is 3620 Horizon Drive, King of Prussia, PA 19072.

     For mutual consideration received, the term of the Original Agreement is hereby extended one month (effective February l, 2002 through February 28, 2002).

     All other terms and conditions remain unchanged.

Agreed to by:

PI MEDICAL, INC.		ADVANCED COMPOSITES
		INDUSTRIES, INC.
By:	/s/ Susan L. Critzer	By:	/s/ George C.H. Chou
Printed Name: Susan L. Critzer		Printed Name: George C.H. Chou
Title: Chief Operating Officer		Title: President
Date: January 29, 2002		Date: January 31, 2002

AGREEMENT

     Effective August 1, 2001 (“Effective Date”), Advanced Composite Industries, Inc., 3620 Horizon Drive, King of Prussia, PA 19072 (“ACT”) and Pi Medical, Inc., 2800 Patton Road, St. Paul, MN 55113 (“Pi Medical”) agree as follows:

1. Replacement of Earlier Agreement

A.	This Agreement supercedes and replaces an original Agreement entitled “Pi Medical, Inc. Research and Development Agreement (“Original Agreement”) executed by the parties on August 11, 2000. Through agreement of the parties, all terms of the Original Agreement had been extended beyond the original termination date up to and including the Effective Date of this Agreement.
B.	As of the Effective Date all obligations (except for continuing obligations of confidentiality and duty to disclose inventions as recited in the Original Agreement) of the parties under the Original Agreement have been faithfully concluded by both parties except only for June 2001 and July 2001 invoices not yet received by Pi Medical.

2. Term: Unless terminated as hereafter provided, this Agreement shall begin on the above Effective Date and end on January 31, 2002 unless earlier terminated below. The parties may negotiate one or more renewals of this Agreement.

3. Project Plan

A.	ACI will make such implants according to the attached quotation of Appendix A and Pi Medical will pay according to the terms of Appendix A.
B.	The parties will agree on a Project Schedule which will include all project activities, estimated cost, lead-time and agreed notations of the parties as to whether any listed activity is either authorized or on hold.

4. Audit Preparation and Cooperation

ACI understands Pi Medical intends to successfully complete an ISO certification audit by the end of October, 2001 (“Anticipated Audit Date”). ACI agrees to an audit by Pi Medical or a third party as part of the Pi Medical audit by the Anticipated Audit Date and will cooperate with Pi Medical in preparation for and during such audit. By the Anticipated Audit Date, ACI will have documentation of the manufacturing processes of the braids made under this Agreement completed in compliance with Pi Medical’s quality systems. Alternatively, ACI may choose to assure the manufacturing process and quality requirements for the production of Pi Medical’s braids by developing their own Standard Operating Procedures to fully document the manufacturing system for the braids made under this Agreement. This ACI Quality System must be sufficient to successfully

complete an audit by one month after the Anticipated Audit Date. In this Section 4, time is of the essence.

5. Confidential Information

A.

Because of the confidential nature of the information which will be disclosed to ACI under this Agreement, ACI will not, except as authorized by Pi Medical, disclose such confidential information to any other third party or company. The obligation of confidentiality shall not be applicable with respect to such information which: (A) was known to ACI prior to disclosure, (B) is or becomes known to the public by general publication without violation of this Agreement, (C) is given to ACI by a third party having a right to do so, or (D) is independently developed by ACI without the use of information supplied by Pi Medical under this Agreement.

B.

Because of the confidential nature of the information, which will be disclosed to ACI under this Agreement, ACI will not do any other consulting, research or development work in the area of snoring treatment involving an implant to stiffen the soft palate without prior approval by Pi Medical during the duration of this Agreement and for one year thereafter.

6. Ownership and Inventions

A. Pi Medical Ownership

If any patentable inventions result from performance of this Agreement, all rights under any patents that may issue on those inventions shall belong exclusively to Pi Medical. ACI hereby assigns and agrees to assign in the future all such inventions to Pi Medical without further payment from Pi Medical. ACI also agrees that, upon Pi Medical’s request and at Pi Medical’s expense, it will provide reasonable assistance to Pi Medical in prosecuting patents covering those inventions. All information, including copyrights, developed by ACI under this Agreement shall belong to Pi Medical and all copyrightable works are works made for hire and ACI hereby assigns and agrees to assign to Pi Medical such rights now and in the future. The obligations to assign inventions and copyrights to Pi Medical shall not apply to any invention or copyright for which no equipment, supplies, facility or trade secret information of Pi Medical was used and which was developed entirely on the ACI’s own time, and (1) which does not relate (a) directly to the business of Pi Medical or (b) to Pi Medical’s actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by the ACI for Pi Medical.

B. Grant Back to ACI

Pi Medical grants ACI a paid-up, non-exclusive license to make, use or sell an invention of paragraph 6.A., above, only to the extent any final or intermediate use of such invention by ACI or any customer or end-user is limited to a field of

2

use not including treatment of snoring, sleep apnea, sleep or breathing disorder or any implant for stiffening tissue for use in the nasal, oral or pharyngeal regions.

C. Pi Medical retains exclusive ownership of all equipment, tools, fixtures, procedures, documentation paid for by Pi Medical (with exception of a previously authorized and paid $100,000 upgrade to the braiding machine). In the event Pi Medical terminates this Amended Agreement at will, no tool removal fee will be charged to Pi Medical.

7. Billing and Expenses

ACI will invoice Pi Medical monthly for all charges incurred during the preceding month. Billing to Pi Medical shall occur only on activities authorized by Pi Medical.

A.	All time tracking, materials purchases, subcontracting and other expenses must be submitted to Pi Medical on a bi-weekly basis for review within one week of the time that the cost is incurred.
B.	ACI is responsible for accuracy/appropriateness of all time tracking for ACI and subcontractors. Costs associated with errors in execution (as mutually agreed upon by ACI and Pi Medical) shall not be passed onto Pi Medical. Pi Medical reserves the right to audit time cards and billing records.
C.	Subcontractor fees and duties, if any, must be pre-approved by Pi Medical.
D.	Time/material charges for work authorized by Pi Medical will be billed at the rates recited in Appendix A.
E.	It is the intent of the parties that time and material charges to Pi Medical would be driven by technical work related to new designs and development of a quality control system. Costs associated with troubleshooting routine production issues for a braid produced at a fixed unit price would not be charged to Pi Medical. All time and material charges together with all other charges shall be within the budget constraints recited in Appendix A.

8. Authority

ACI shall not have the right to bind Pi Medical or commit Pi Medical to any agreement or understanding with any third party whatsoever.

9. Termination

Pi Medical may terminate this Agreement prior to the conclusion date but shall remain liable for all costs incurred. up to the date of termination. ACI may also terminate but shall be liable for returning all documents, equipment and other property to Pi Medical within 30 days. Pi Medical shall pay shipping costs for all items returned to Pi Medical following termination.

3

10. Notices

All notices required or permitted by this Agreement shall be in writing and shall be delivered in person or sent by certified or. registered mail, return receipt required, postage paid to the addresses stated above or to other’s address as either party may designate. All mailing notices shall be deemed effective upon depositing in the mail.

11. Waiver

The waiver of either party of a breach of any provision of this Agreement shall not operate as or be construed as a continuing waiver or as a consent to or waiver of such subsequent breach.

12. Modification

This Agreement may only be modified in writing signed by both parties.

13. Non-assignable

Since the services to be provided under this Agreement are personal, all duties to be executed by ACI shall be performed by ACI and may not be assigned or delegated without written consent of Pi Medical.

14. Entire Agreement

This Agreement constitutes the entire Agreement between the parties with respect to the subject matter hereof and supersedes all previous agreements and understandings rather oral or written between the parties with respect to the subject hereof.

15. Governing Law

This Agreement shall be governed by the laws of the State of Minnesota.

AGREED TO BY:

PI MEDICAL, INC.		ADVANCED COMPOSITES
		INDUSTRIES, INC.
By:	/s/ S. L. Critzer	By:	/s/ George C.H. Chou
	Susan L. Critzer		George C.H. Chou
Title: Chief Operating Officer		Title: President
Date: August 13, 2001		Date: August 17, 2001

4

APPENDIX A

A. Unit Braid Price

1.	ACI shall charge a fixed unit price of $22.71 per unit for braids made in accordance with Pi Medical drawing numbers 400005 and 100029.
2.	All products shall conform to specifications on Pi Medical drawing numbers 400005 and 100029.
3.	All manufacturing shall follow the process steps of ACI flowchart dated 6 June 2001 (a reduced-in-size copy attached hereto). Any changes to the flow chart require mutual agreement of the parties.
4.	The unit cost shall include materials, machine set-up, braiding, in-process quality control at ACI, welding, cleaning, packaging, labeling, shipping to Pi Medical, maintaining routine quality control records and equipment maintenance. Attached is a 7/30/01 Braid Quality Control plan listing routine quality control.
5.	The unit cost may be adjusted (increased or decreased) based on requested changes to the process.
6.	The foregoing unit price is based on a delivery schedule of 500 accepted unites delivered in each of the six months of the term of this Agreement with an initial delivery in August, 2001. It is preferred that 250 accepted units be delivered by the 15th of each of said months with the remainder delivered by the end of each of said months. Failure of ACI to deliver accepted units in the quantities described within 30-days of the above-stated due dates is a breach of this agreement.

B. Time and Material Charges

Time/material charges for work authorized by Pi Medical will be billed at the following rates:

1.	ACI Program Management	$125 /hr
2.	ACI Senior Design Engineer	$150 /hr
3.	Subcontract Senior Design Engineer	$150 /hr
4.	ACI Manufacturing Engineer	$  60 /hr
5.	ACI Manufacturing Technician	$  46 /hr
6.	DET subcontract Program Management/QC Engineer	$125 /hr
7.	DET subcontract Mechanical Engineer/Technician	$105 /hr

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C. Budget Constraint

Monthly charges to Pi Medical shall not exceed $25,000 for any one month with ACI assuming any overage. The monthly budget shall be a monthly average of $20,000 per month and the total cash paid over the term of this Agreement shall not exceed $120,000. The monthly budget is the sum of time and materials and production unit charges for that month.

[ACI Production Flow Chart and Quality Control System]

6

EX-10.15

Exhibit 10.15

ASSIGNMENT
AND
GRANT-BACK OF LICENSE

     This Agreement is effective November 28, 2001 by and between Pi Medical, Inc., 2800 Patton Road, St. Paul, MN 55113 (“Pi Medical”) and Venturi Development Inc., 2800 Patton Road, St. Paul, MN 55113 (“VDI”) (Pi Medical and VDI are collectively referred to as the “Parties”).

     For one dollar and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:

1.	Pi Medical hereby irrevocably assigns to VDI its entire right, title and interest to all copyrights, patents, if any, inventions and supporting documentation and software in all of the standard operating procedures, policies and systems identified in the attached Exhibit A.
2.	VDI hereby grants back to Pi Medical a non-exclusively, worldwide, fully paidup license to all rights assigned in the above Section 1.

Agreed to by:
Pi Medical, Inc.		Venturi Development, Inc.
By:	/s/ Timothy R. Conrad	By:	/s/ Mark. B. Knudson
Printed Name: Timothy R. Conrad		Printed Name: Mark B. Knudson
Its: Vice President		Its: President
Date: November 28, 2001		Date: November 28, 2001

EXHIBIT “A”

Document		Effective
Number	Description	Date	Rev. Level
POLICY-01	Quality Manual Policy	2/28/2002	C
POLICY-02	Information Security File	Pending	—
POLICY-03	Safety policy	Pending	—
SOP1001	Product Design and Development Procedure	12/7/2001	F
SOP1002	Test Management Procedure	1/11/2002	E
SOP1003	Test Protocol / Reporting Procedure	8/1/2001	D
SOP1004	Risk Analysis Procedure	12/17/2001	B
SOP1005	Verification, Validation and Qualification Testing Requirements	11/19/2001	C
SOP1006	Laboratory Notebook & Invention Disclosure Procedure	1/16/2002	C
SOP1007	Use	—	—
SOP1008	Pre-Clinical Studies	8/1/2001	C
SOP1010	Software Development and Validation Manufacturing/Test Software	5/16/2001	A
SOP1011	Product Biocompatibility	12/14/2001	B
SOP3001	Document Generation, Content, and Identification	1/16/2002	F
SOP3002	Change Order	1/16/2002	E
SOP3003	Document and Data Storage and Access	1/8/2002	B
SOP3004	Article Identification: Definition, Description, and Administration	12/11/2001	C
SOP3005	Review, Approval, and Control of Labeling and Literature	10/25/2001	B
SOP3006	Use	—	—
SOP3007	Technical File procedure	3/4/2002	A
SOP3008	Standards Library/Database Procedure	9/11/2001	A
SOP3009	Document Formatting Standards	12/11/2001	B
SOP4001	Supplier Selection, Qualification and Certification Procedure	1/18/2002	D
SOP4002	Supplier Auditing Procedure	1/18/2002	D
SOP4003	Request for Quote/Request for Information Process	7/10/2001	B
SOP4004	Purchase Order Procedure	12/11/2001	E
SOP4005	Purchase Requisition and Amendment	3/11/2002	C
SOP4006	Device History Records	9/25/2001	C
SOP4007	Non-Conforming Material Review Board	9/25/2001	B
SOP4008	Product Receiving, Handling, and Storage	6/15/2001	B
SOP4009	Material Identification and Acceptance Status Procedure	2/1/2002	D
SOP4010	Lot/Serial Number Control	8/22/2001	B
SOP5001	Product Monographs	2/1/2002	F
SOP5002	Manufacturing Procedure Content	5/7/2002	B
SOP5003	Preventive Maintenance System	9/20/2001	B

A-1

Document		Effective
Number	Description	Date	Rev. Level
SOP5004	Custom Tool Approval	1/18/2002	B
SOP5005	Custom Equipment Selection, Acceptance and Qualification	1/9/2002	B
SOP5006	Product Sterilization, Ethylene Oxide Procedure	1/21/2002	C
SOP5007	Process Control	10/22/2001	A
SOP5008	Statistical Techniques	4/11/2001	A
SOP5009	Controlled Environment	4/26/2002	E
SOP5010	Product Inspection Test, and Acceptance	2/26/2002	B
SOP5011	Engineering Evaluations	2/26/2002	B
SOP5012	Product Sterilization, Radiation Procedure	4/16/2002	A
SOP6001	Non-Disclosure Agreement	1/18/2002	B
SOP6002	Consulting Agreements Procedure	1/18/2002	C
SOP6003	Employee Training Program	1/21/2002	B
SOP6004	Employee Position Descriptions	2/25/2002	C
SOP6005	Employee Performance Evaluation	1/21/2002	B
SOP6006	Training Database	1/21/2002	B
SOP6007	Facility Controls	6/25/2001	A
SOP6008	Signature Authority and Delegation of Signature Authority	1/22/2002	B
SOP6009	Disaster and Evacuation Protocol	3/27/2002	B
SOP6010	Accounts Payable - Invoice Approval Process	6/25/2001	A
SOP6011	Property Identification Tracking System	10/3/2001	B
SOP6012	Chemical Ordering	Pending	—
SOP6013	Hazardous Waste Management	Pending	—
SOP6014	Hazard Communication Program (Right to Know)	Pending	—
SOP6015	Bloodborne Pathogen Procedure	Pending	—
SOP7001	Clinical Trial Overview	5/8/2002	A
SOP7002	Use	—	—
SOP7003	Writing A Clinical Protocol	2/27/2002	D
SOP7004	Writing An Investigators Brochure	2/27/2002	B
SOP7005	Site Initiation	2/27/2002	B
SOP7006	Routine Monitoring Visits	2/27/2002	B
SOP7007	Study Close-out Visits	6/6/2001	A
SOP7008	CRF Processing and Data Management	10/18/2001	B
SOP7009	Study Final report	5/8/2002	A
SOP7010	Clinical Study Files	5/8/2002
SOP7011	Product Recalls/Field Corrective Actions	9/27/2001	A
SOP7012	Management Review Procedure	8/27/2001	B
SOP7013	Medical Device Reporting	3/1/2002	B
SOP7014	Internal deviations	Pending	—

A-2

Document		Effective
Number	Description	Date	Rev. Level
SOP7015	Gage Repeatability and Reproducibility Evaluations	2/15/2002	B
SOP7016	Calibration System Procedure	3/5/2002	C
SOP7017	Adverse Event Reportind	4/9/2001	A
SOP7018	Vigilance Reporting	9/27/2001	A
SOP7019	Biohazard Material Handling	Pending	—
SOP7020	Internal Quality Audits	11/5/2001	C
SOP7021	Complaint and Return Goods Analysis	3/1/2002	B
SOP7022	Corrective and Preventive Actions (CAPA)	8/27/2001	B
SOP7023	Regulatory Inspections	3/1/2002	B
SS-001	ASD I, System Specification	9/21/2001	B
SS-002	CAPA Database, System Specification	6/25/2001	B
SS-003	Delivery System II, System Specification	12/18/2001	B
SS-004	Test Log	6/6/2001	A
SS-005	Preventive Maintenance Database, System Specification	7/31/2001	A
SS-006	Suppliers and Associated Lot Information Database (ASL)	4/22/2002	B

A-3

EX-14.1

Exhibit 14.1

RESTORE MEDICAL, INC.

CODE OF BUSINESS CONDUCT AND ETHICS FOR DIRECTORS, OFFICERS
AND EMPLOYEES

Introduction

          This Code of Business Conduct and Ethics (the “Code”) covers a wide range of business practices and procedures for Restore Medical, Inc. (“Restore Medical,” “we,” “us,” or “our”). This Code does not cover every issue that may arise, but it sets out basic principles to guide all of our employees, officers and directors.

          All of our employees, officers and directors are expected to read and become familiar with the ethical standards described in this Code, must conduct themselves accordingly and seek to avoid even the appearance of improper behavior.

          The Code also should be provided to and followed by our agents and representatives, including consultants.

          Our Board of Directors is responsible for setting the standards of business conduct contained in this Code and updating these standards as it deems appropriate to reflect changes in the legal and regulatory framework that applies to our business, the business practices within our industry, and the prevailing ethical standards of the communities in which we operate. While our Chief Financial Officer (or other officer designated from time to time by the Board of Directors) will oversee the procedures designed to implement this Code to ensure that they are operating effectively, it is the individual responsibility of each of our directors, officers and employees to comply with this Code.

          If a law conflicts with a policy in this Code, you must comply with the law; however, if a local custom or policy conflicts with this Code, you must comply with the Code. Questions should be referred to the employee’s supervisor or to our Chief Financial Officer.

          Those individuals who violate the standards in this Code, or who make false attestations as to their compliance with this Code, will be subject to appropriate disciplinary action, which may include demotion or termination of employment. If you are in a situation that you believe may violate or lead to a violation of this Code, follow the guidelines described in Sections 14 and 15 of this Code.

     1. Compliance with Laws, Rules and Regulations

          Obeying the law, both in letter and in spirit, is the foundation on which our ethical standards are built. All employees, officers and directors must respect and obey the laws of the cities, states and countries in which we operate. Although not all employees, officers and directors are expected to know the details of these laws, it is important to know enough to determine when to seek advice from supervisors, managers or other appropriate personnel.

     2. Conflicts of Interest

          Conflicts of interest are prohibited as a matter of Restore Medical policy, except under guidelines approved by our Board of Directors. A “conflict of interest” exists when a person’s private interests interfere in any way with the interests of Restore Medical. A conflict situation can arise when an employee, officer or director takes actions or has interests that may make it difficult to perform his or her work for Restore Medical objectively and effectively.

          Conflicts of interest may also arise when an employee, officer or director, or members of his or her family, receives improper personal benefits as a result of his or her position within Restore Medical. Loans to, or guarantees of obligations of, employees and/or their family members may create conflicts of interest and are expressly prohibited, with the exception of pre-approved loans from Restore Medical to employees for moving and relocation, or except as otherwise expressly approved, in writing, by the appropriate officers and/or directors of Restore Medical in accordance with our written policies.

          The best policy is to avoid any direct or indirect business connection with our customers, suppliers or competitors, except on behalf of Restore Medical. In particular, without the specific permission of our Chief Financial Officer, no director, officer or employee shall

• be a consultant to, or a director, officer or employee of, or otherwise operate or have a significant financial interest in an outside business that markets products or services in competition with our current or potential products and services or supplies or purchase products or services to or from us.

• seek or accept any personal loan or services from any entity with which we do business, except from financial institutions or service providers offering similar loans or services to third parties under similar terms in the ordinary course of their respective businesses; or

• be a consultant to, or a director, officer or employee of, or otherwise operate an outside business if the demands of the outside business would interfere

with the director’s, officer’s or employee’s responsibilities to us (if in doubt, consult your supervisor or our Chief Financial Officer).

          Directors and employees must notify and inform our Chief Financial Officer prior to accepting an appointment to the board of directors or the advisory board of any public or privately held company. The disclosure requirements and other possible conflict of interest issues involved will be analyzed and discussed at the time of any such notification.

          Conflicts of interest may not always be clear-cut, so if an employee has a question, he or she should consult with his or her supervisor or our Chief Financial Officer. Any employee, officer or director who becomes aware of an actual or apparent conflict or potential conflict should bring it to the attention of a supervisor, manager or other appropriate personnel or consult the procedures described in Section 15 of this Code.

     3. Insider Trading

          Employees, officers and directors who have access to confidential information about Restore Medical, its business relationships and operations are not permitted to use or share that information for stock trading purposes or for any other purpose except the conduct of our business. All non-public information about Restore Medical, its business relationships and operations should be considered confidential information. To use non-public information for personal financial benefit or to “tip” others who might make an investment decision on the basis of this information is not only unethical but also illegal. In order to assist us in our efforts to ensure compliance with laws against insider trading, we have adopted a specific policy governing employee’s trading in securities of Restore Medical. This policy will be made available to every employee. If you have any questions, please consult our Chief Financial Officer.

     4. Corporate Opportunities

          Our employees, officers and directors are prohibited from personally taking advantage of opportunities that are discovered through the use of corporate property, information or position without the consent of our Board of Directors. No employee or director may use corporate property, information, or position for improper personal gain, and no employee may compete with Restore Medical directly or indirectly. Employees, officers and directors owe a duty to Restore Medical to advance its legitimate interests when the opportunity to do so arises.

     5. Competition and Fair Dealing

          We seek to outperform our competition fairly and honestly. We seek competitive advantages through superior performance, never through unethical or illegal business

practices. Stealing proprietary information, possessing trade secret information that was obtained without the owner’s consent, or inducing such disclosures by past or present employees of other companies is prohibited. Each of our employees should endeavor to respect the rights of and deal fairly with our customers, suppliers, competitors and employees. None of our employees should take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other intentional unfair-dealing practice.

          To build and maintain our valuable reputation, compliance with our quality processes and safety requirements is essential. In the context of ethics, quality requires that our products and services be designed and manufactured to meet our obligations to customers. All inspection and testing documents must be handled in accordance with all applicable regulations.

          The purpose of business entertainment and gifts in a commercial setting is to create goodwill and sound working relationships, not to gain unfair advantage with customers. No gift or entertainment should ever be offered, given, provided or accepted by any of our employees, directors, agents, or family members thereof, unless it: (1) is not a cash gift; (2) is consistent with customary business practices; (3) cannot be construed as a bribe or payoff, and (4) does not violate any laws or regulations. Business gifts given or received should be of nominal value. Employees should discuss with their supervisors or our Chief Financial Officer any gifts or proposed gifts that they are not certain are appropriate.

     6. Discrimination and Harassment

          The diversity of our employees, officers and directors is a tremendous asset and resource. We are firmly committed to providing equal opportunity in all aspects of employment and will not tolerate any illegal discrimination or harassment of any kind. Examples include derogatory comments based on racial or ethnic characteristics, sexual preference, religious beliefs, and unwelcome sexual advances.

     7. Health and Safety

          We strive to provide each of our employees with a safe and healthy work environment and to conduct our activities in full compliance with all applicable environmental laws. Each of our employees has responsibility for maintaining a safe and healthy workplace for all employees by following safety and health rules and practices and reporting accidents, injuries and unsafe equipment, practices or conditions.

          Violence and threatening behavior are not permitted. Employees should report to work in condition to perform their duties, free from the influence of illegal drugs or alcohol. The use of illegal drugs in the workplace will not be tolerated.

     8. Record-Keeping

          We require honest and accurate recording and reporting of information in order to make responsible business decisions. For example, only the true and actual number of hours worked should be reported.

          Many employees regularly use business expense accounts, which must be documented and recorded accurately. If you are not sure whether a certain expense is legitimate, ask your supervisor or our Chief Financial Officer. All of our books, records, accounts and financial statements must be maintained in reasonable detail, must appropriately reflect Restore Medical’s transactions and must conform both to applicable legal requirements and to our system of internal controls. Unrecorded or “off the books” funds, assets or obligations are prohibited and should not be maintained.

          Business records and communications often become public, and we should avoid exaggeration, derogatory remarks, guesswork, or inappropriate characterizations of people and companies that can be misunderstood. This policy applies equally to e-mail, internal memos, and formal reports. Records should always be retained or destroyed according to our record retention policies. In accordance with those policies, in the event of litigation or governmental investigation please consult our Chief Financial Officer.

     9. Confidentiality

          Employees, officers and directors must not disclose confidential information entrusted to them by us or our customers, except when disclosure is authorized by our legal counsel, or as may otherwise be required by applicable laws or regulations. Confidential information includes all non-public information that might be of use to competitors, or harmful to us or our customers, if disclosed. Confidential information also includes information that suppliers and customers have entrusted to us.

          Maintaining confidentially includes ensuring that access to work areas and computers is properly controlled, and refraining from discussions of sensitive matters in public places, such as elevators, hallways, restaurants, restrooms, etc. Not disclosing confidential information means not communicating the information by any means including, without limitation, orally, in writing, or electronically (e.g., in person or via telephone, mail, fax, email, Internet “chat rooms,” posting to community bulletin boards, or otherwise). In addition to the foregoing, you are also prohibited from using any proprietary or confidential information for any unauthorized purpose, including for your own personal gain. The obligation to preserve confidential information continues even after employment or directorship terminates.

     10. Protection and Proper Use of Restore Medical Assets

          All employees, officers and directors should endeavor to protect our assets and ensure their efficient use. Theft, carelessness, and waste have a direct impact on our profitability. Any suspected incident of fraud or theft should be immediately reported for investigation. Restore Medical equipment should not be used for non-company business, though incidental personal use may be permitted.

          The obligation of our employees, officers and directors to protect our assets includes our proprietary information. Proprietary information includes intellectual property such as trade secrets, patents, trademarks and copyrights, as well as business, marketing and service plans, engineering and manufacturing ideas, designs, databases, records, salary information and any unpublished financial data and reports. Unauthorized use or distribution of this information would violate Restore Medical policy, and it also could be illegal and result in civil or criminal penalties.

     11. Payments to Government Personnel

          The U.S. Foreign Corrupt Practices Act (“FCPA”) prohibits giving anything of value, directly or indirectly, to officials of foreign governments or foreign political candidates in order to obtain or retain business. Making illegal payments to government officials of any country is strictly prohibited. In addition, the U.S. government has a number of laws and regulations regarding business gratuities that may be accepted by U.S. government personnel. The promise, offer or delivery to an official or employee of the U.S. government of a gift, favor or other gratuity in violation of these rules would not only violate Restore Medical policy but could also be a criminal offense. State and local governments, as well as foreign governments, may have similar rules. Questions and/or requests for interpretations should be reviewed and all actions pre-approved by our legal counsel responsible for FCPA compliance.

     12. Anti-Boycott Laws

          U.S. law prohibits U.S. persons from taking actions or entering into agreements that have the effect of furthering any unsanctioned boycott of a country that is friendly to the United States. This prohibition applies to persons located in the United States (including individuals and companies), U.S. citizens and permanent residents anywhere in the world, and most activities of U.S. subsidiaries abroad. In general, these laws prohibit the following actions (and agreements to take such actions) that could further any boycott not approved by the United States: (1) refusing to do business with other persons or companies (because of their nationality, for example); (2) discriminating in employment practices; (3) furnishing information on the race, religion, gender, or national origin of any U.S. person; (4) furnishing information about any person’s affiliations or business relationships with a boycotted country or with any person believed

to be blacklisted by a boycotting country; or (5) utilizing letters of credit that contain prohibited boycott provisions.

          We are required to report any request to take action, or any attempt to reach agreement on such action, that would violate these prohibitions. Each employee should understand the policies of their business unit that are designed to ensure compliance with these laws. All employees should also be alert to the fact that boycott-related requests can be subtle and indirect. Questions and/or requests for interpretations should be reviewed and all actions pre-approved by our legal counsel responsible for anti-boycott compliance.

     13. U.S. Embargoes and Sanctions

          We engage in a significant amount of international trade. We comply fully with U.S. economic sanctions and embargoes restricting U.S. persons, corporations and, in some cases, foreign subsidiaries, from doing business with certain countries, groups and individuals, including organizations associated with terrorist activity and narcotics trafficking. Economic sanctions may prohibit doing business of any kind with targeted governments and organizations, as well as individuals and entities that act on their behalf. U.S. economic sanctions also may restrict investments in certain targeted countries, as well as trading in goods, technology, and services with a targeted country. U.S. persons may not approve or facilitate transactions by a third party that the U.S. person could not do directly. Questions and/or requests for interpretations should be reviewed and all actions pre-approved by our legal counsel responsible for compliance with U.S. economic sanctions.

     14. Reporting Fraud or any other Illegal or Unethical Behavior

          All employees are responsible for reporting fraud, falsification of records or reports, misappropriation of funds or other assets of Restore Medical and other irregularities. Managers should become familiar with the types of irregularities that might occur in their area of responsibility and must establish standards and procedures designed to prevent and detect irregularities. Fraud applies to any irregularity or suspected irregularity related to our business and involving employees, vendors, or persons that provide service or materials.

          Employees, officers and directors are encouraged to talk to supervisors, managers or other appropriate personnel about observed fraudulent, illegal or unethical behavior and, when in doubt, about the best course of action in a particular situation. If you suspect fraud, do not discuss the matter with any of the individuals involved and do not attempt to investigate or determine facts on your own. To report fraudulent, illegal or unethical behavior, or if you have a question regarding the appropriate course of action, follow the guidelines described in Section 15 of this Code. It is our policy not to allow retaliation for reports of misconduct by others made in good faith by employees. Employees are expected to cooperate in internal investigations of misconduct. Our Chief

Financial Officer will investigate any reported violations and will oversee an appropriate response, including corrective action and preventative measures.

          Employees must read our Employee Complaint Procedures for Accounting and Auditing Matters below, which describes our procedures for the receipt, retention, and treatment of complaints that we receive regarding accounting, internal accounting controls, or auditing matters. Any employee may submit a good faith concern regarding questionable accounting or auditing matters without fear of dismissal or retaliation of any kind.

     15. Compliance Procedures

          We must all work to ensure prompt and consistent action against violations of this Code. However, in some situations it is difficult to know if a violation has occurred. Since we cannot anticipate every situation that will arise, it is important that we have a way to approach a new question or problem. All employees should keep the following steps keep in mind when evaluating a possible violation of the Code:

• Make sure you have all the facts. In order to reach the right solutions, we must be as fully informed as possible.

• Ask yourself: What specifically am I being asked to do? Does it seem unethical or improper? This question will enable you to focus on the specific situation you are faced with, and the alternatives you may have. Use your judgment and common sense; if something seems unethical or improper, it probably is.

• Clarify your responsibility and role. In most situations, there is shared responsibility. Are your colleagues informed? If so, it may help to get others involved and discuss the problem.

• Discuss the problem with your supervisor. This recommendation is basic guidance for all situations. In many cases, your supervisor will be more knowledgeable about the question, and will appreciate being brought into the decision-making process. Remember that it is your supervisor’s responsibility to help solve problems.

• Seek help from Restore Medical resources. In the rare case where it may not be appropriate to discuss an issue with your supervisor, or in situations where you do not feel comfortable approaching your supervisor with your question, please discuss the issue with our Chief Financial Officer.

          You may report the ethical violations in confidence and without fear of retaliation. If your situation requires that your identity be kept secret, we will take steps to ensure your anonymity will be protected. We do not permit retaliation of any kind against employees for good faith reports of ethical violations.

     16. Code of Ethics for Senior Financial Officers

          Our Chief Executive Officer and Chief Financial Officer and the other senior financial officers performing similar functions who have been identified by our Chief Executive Officer (collectively, the “Senior Financial Officers”) are responsible for full, fair, accurate, timely and understandable disclosure in the periodic reports that we are required to file with the Securities and Exchange Commission (“SEC”). In addition to being bound by all other provisions of our Code of Business Conduct and Ethics, our Chief Executive Officer and all Senior Financial Officers are subject to the following specific provisions:

• Each Senior Financial Officer shall act with honesty and integrity in the performance of his or her duties at Restore Medical, shall comply with laws, rules and regulations of federal, state and local governments and other private and public regulatory agencies that affect the conduct of our business and our financial reporting.

• Each Senior Financial Officer is prohibited from directly or indirectly taking any action to interfere with, fraudulently influence, coerce, manipulate or mislead our independent public auditors in the course of any audit of our financial statements or accounting books and records.

• Each Senior Financial Officer shall promptly bring to the attention of the internal management disclosure team any material information of which he or she may become aware that could affect the disclosures made by us in our public filings or otherwise assist management in fulfilling its responsibilities.

• Each Senior Financial Officer shall promptly bring to the attention of our internal management disclosure team and the Audit Committee of our Board of Directors any information he or she may have concerning (a) significant deficiencies in the design or operation of internal controls which could adversely affect our ability to record, process, summarize and report financial data, or (b) any fraud, whether or not material, that involves management or other employees who have a significant role in our financial reporting, disclosures or internal controls.

• Each Senior Financial Officer shall promptly bring to the attention of the Audit Committee of our Board of Directors any information he or she may

	have concerning any violation of this Code by any employee who has a significant role in our financial reporting, disclosures or internal controls.
•	Each Senior Financial Officer shall promptly bring to the attention of our Chief Financial Officer and the Audit Committee of our Board of Directors any information he or she may have concerning evidence of a material violation of the securities or other laws, rules or regulations that apply to us and the operation of our business, by us or any of our agents, or of violation of this Code or of these additional procedures.
•	Each Senior Financial Officer shall promptly bring to the attention of our Chief Financial Officer and the Audit Committee of our Board of Directors, any material transaction or relationship that arises and of which he or she becomes aware that reasonably could be expected to give rise to an actual or apparent conflict of interest.

          Our Board of Directors shall determine, or designate appropriate persons to determine, appropriate actions to be taken in the event of violations of this Code by our Senior Financial Officers. Such actions shall be reasonably designed to deter wrongdoing and to promote accountability for adherence to this Code, and may include written notices to the individual involved that our Board has determined that there has been a violation, censure by our Board, demotion or re-assignment of the individual involved, suspension with or without pay or benefits and termination of the individual’s employment.

     17. Employee Complaint Procedures for Accounting and Auditing Matters

          Any of our employees may submit a good faith complaint regarding accounting or auditing matters to our management without fear of dismissal or retaliation of any kind. We are committed to achieving compliance with all applicable securities laws and regulations, accounting standards, accounting controls and audit practices. The Audit Committee of our Board of Directors will oversee treatment of employee concerns in this area.

          In order to facilitate the reporting of employee complaints, the Audit Committee of our Board of Directors has established the following procedures for (1) the receipt, retention and treatment of complaints regarding accounting, internal accounting controls, or auditing matters, and (2) the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters (collectively, “Accounting Matters”).

Receipt of Employee Complaints

• Employees with concerns regarding Accounting Matters may report their concerns to our Chief Financial Officer.

• Employees may forward complaints on a confidential or anonymous basis to the Chairman of our Audit Committee of our Board of Directors via e-mail at the following address: auditchair@restoremedical.com

Scope of Matters Covered by these Procedures

          These procedures relate to employee complaints relating to any Accounting Matters, including, without limitation, the following:

• fraud or deliberate error in the preparation, evaluation, review or audit of any of our financial statements;

• fraud or deliberate error in the recording and maintaining of any of our financial records;

• deficiencies in or noncompliance with the our internal accounting controls;

• misrepresentation or false statement to or by a senior officer or accountant with respect to a matter contained in our financial records, financial statements or audit reports; or

• deviation from full and fair reporting of our financial condition.         .

Treatment of Complaints

• Upon receipt of a complaint, our Chief Financial Officer or the Chairman of our Audit Committee, as appropriate, will (1) determine whether the complaint actually pertains to Accounting Matters, and (2) when possible, acknowledge receipt of the complaint to the sender.

• Complaints relating to Accounting Matters will be reviewed under Audit Committee direction and oversight by our Chief Financial Officer or another senior officer designated by our Audit Committee (or such other persons as our Audit Committee determines to be appropriate). Confidentiality will be maintained to the fullest extent possible, consistent with the need to conduct an adequate review.

• Prompt and appropriate corrective action will be taken when and as warranted in the judgment of our Audit Committee.

• We will not discharge, demote, suspend, threaten, harass or in any manner discriminate against any employee in the terms and conditions of his or her employment based upon any lawful actions of such employee with respect to good faith reporting of complaints regarding Accounting Matters or otherwise as specified in Section 806 of the Sarbanes-Oxley Act of 2002.

Reporting and Retention of Complaints and Investigations.

          Our Chief Financial Officer will maintain a log of all complaints, tracking their receipt, investigation and resolution and shall prepare a periodic summary report thereof for our Audit Committee. Copies of complaints and such log will be maintained as directed by our Audit Committee.

     18. Waivers of the Code

          Every effort will be made to resolve potential conflicts of interest or potential violations of this Code when these situations are disclosed promptly to management and the parties involved have acted in good faith. In the unlikely event potential conflicts of this Code cannot be resolved, waivers will only be given for matters where it is absolutely appropriate under the circumstances and granting of such a waiver will not present a material financial or reputational risk to Restore Medical. Any waiver for executive officers and directors must be approved, in advance, by our full Board of Directors and will be promptly disclosed to our stockholders, along with the reasons for the waiver, as required by applicable law or stock exchange regulation.

EX-23.1

Exhibit 23.1

When the common stock reverse split referred to in Note 17 of the Notes to Financial Statements has been consummated, we will be in a position to render the following consent:

/s/ KPMG LLP

Consent of Independent Registered Public Accounting Firm

The Board of Directors
Restore Medical, Inc.:

We consent to the use of our report dated March 6, 2006, except as to Note 17 which is as of _______________, with respect to the balance sheets of Restore Medical, Inc. as of December 31, 2004 and 2005, and the related statements of operations, shareholders’ deficit, and cash flows for each of the years in the three-year period ended December 31, 2005, included herein, and to the reference of our firm under the headings “Selected Financial Data” and “Experts” in the prospectus.

Our report contains explanatory paragraphs stating that the financial statements as of December 31, 2003 and as of and for the year ended December 31, 2004 have been restated and that the Company changed its method of accounting for preferred stock warrants subject to redemption upon the adoption of Statement of Financial Accounting Standard No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity on July 1, 2003.

Minneapolis, Minnesota