S-1/A

As filed with the Securities and Exchange Commission on April 14, 2006

Registration No. 333-132368

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 1

to

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

     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 April 14, 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 (ear, nose and throat physicians, 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. Since we commenced operations in 1999, we have incurred net losses primarily from costs relating to the development and commercialization of our Pillar System. At December 31, 2005, we had an accumulated deficit of $38.1 million.

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.

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      In a separate report, the American Academy of Otolaryngology 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 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 whose partner experienced sleep-related problems, including heavy snoring, determined that 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.

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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.

      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. 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 31, 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 31, 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 31, 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 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;

•  our gross margins, or total gross profit as a percentage of total net sales, may decline if revenue from international sales of Pillar Systems, as a percentage of total net sales, increases relative to US sales of Pillar Systems, since we typically sell Pillar Systems to international distributors for approximately 50% of our US average selling price;

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•  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.

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.

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      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 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

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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 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;

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•  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;

•  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 Shanghai Sanjiu Technology Development Co., Ltd., our international distributor in China, represented approximately 11% of our total worldwide net sales. 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 applications. We cannot assure you that any of our pending

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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 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 and others may initiate intellectual property litigation, including 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

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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 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

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continue to accept and recommend the Pillar Procedure, our revenues could be materially affected.

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.

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      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, 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 31, 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 31, 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 31, 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	%

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      As of March 31, 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 31, 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. Assuming the exercise in full of all our outstanding options and warrants, adjusted net tangible book value at December 31, 2005 would be $           per share, representing additional dilution per share to new investors of $          .

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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 statement of operations data for the years ended December 31, 2001 and 2002 and the balance sheet data as of December 2001, 2002 and 2003 are derived from our unaudited financial statements. Our unaudited financial statements include, in the opinion of our management, all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of those statements. 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;

          (b)  correcting the accounting for preferred stock warrants subject to mandatory redemption under SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity;

          (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. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy, contains forward-looking statements that involve risk, uncertainties and assumptions. You should review the “Risk Factors” section of this prospectus for a discussion of important factors that could cause actual results to differ materially from those described in or implied by the forward-looking statements contained in the following discussion and analysis 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

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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. 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

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development activities, which will be primarily funded with our currently available cash and the 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 measure compensation costs for options issued under our stock-based compensation plans using the intrinsic-value method of accounting. We record 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 on a straight-line basis over the vesting period of the underlying stock option grants.

      Subsequent to the commencement of the initial public offering process, we determined that certain of the stock options granted for the years 2003, 2004 and 2005 were granted with exercise prices below the reassessed fair value of the common stock on the date of grant. With respect to these options, we 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. We estimated the fair market value of our common stock based upon several factors, including progress and milestones attained in our business, sales of preferred stock, changes in valuation of existing comparable public companies, weighted probability analysis of fair value from an initial public offering, sale of the company, continued private company operations and company dissolution scenarios, and the expected valuation that the company would obtain in an initial public offering. In subsequent periods and prior to the effective date of this offering, the fair value of the common stock will be determined by management using the factors discussed above.

      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

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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. 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. Our 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, in consideration for a modification of the definition of a “qualified” initial public offering such that this offering triggers the mandatory conversion of our preferred stock into common stock. 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.

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      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 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

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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 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

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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.

      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. Due to the market development investment and distribution costs incurred by our international third-party distributors, our international ASP is typically 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 and other benefit expenses of $738,688 due to increased headcount, including the hiring of our new President and CEO in 2005, as well as the resignation of his predecessor, including stock-based compensation expenses of $433,688. 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 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 increase in

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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, 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 to focus on the development, redesign and commercialization of the Pillar delivery system for commercial introduction in 2005.

      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

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related to an increase in payroll, benefits and recruiting costs of $367,904 due to increased 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 $661,243 of 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

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first quarter of 2006, we 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 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

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certain of our domestic customers and international distributors to extend the time of payment 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

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and results of operations could be adversely affected due to movements in interest rates. In 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. Under the prospective method, compensation cost will be recognized based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date. We applied the intrinsic value method for awards granted before the effective date of SFAS 123(R).

      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 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 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 (ear, nose and throat physicians, or ENTs) and to a limited number of oral maxillofacial surgeons, as a minimally-

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invasive, clinically-effective treatment for mild to moderate OSA and snoring. Our Pillar System has been cleared by both 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

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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.

      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

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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 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 of 18 clinical studies including 497 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 38.2%. In a separate analysis published in January 2005 by the American Laryngological, Rhinological and Otological Society 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

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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 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 whose partner experienced sleep-related problems, including heavy snoring, determined that 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.

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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 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 (3)	Yes	No	Yes	No	No
FDA CLEARANCE
OSA	Yes	Yes	N/A(4)	N/A(4)	No(5)	No
Snoring	Yes	No	N/A(4)	N/A(4)	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(6)	$1,500 to $3,000(7)	$9,600 to $16,400(8)	$1,500 to $3,000	$350 to $500 (9)
Reimbursed cost(10)	N/A	$1,200 to $2,500(6)	N/A	$3,100 to $6,800(8)	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)	We are actively working with the Center for Medicare and Medicaid Services and private insurance carriers to obtain coverage and coding for the Pillar Procedure to treat mild to moderate OSA.
(4)	FDA clearance not required for surgical procedures.
(5)	Cleared for tongue-based OSA only.
(6)	Plus annual accessory costs of $300 to $500.
(7)	Multiple procedures may be required.
(8)	Price varies considerably between out-patient procedure and hospital procedure requiring an overnight stay.
(9)	Ongoing treatments required.

(10)  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.

Obstructive Sleep Apnea

      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 of 18 clinical studies including 497 patients who underwent a UPPP procedure to treat their OSA reported a clinical measure of improvement in the level of patients’ sleep disturbances of 38.2%. In a separate analysis published in January 2005 by the American Laryngological, Rhinological and Otological Society 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 Patent Cooperation Treaty 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. Our Pillar System is currently approved for sale in the following countries in the Asia Pacific region: China, Singapore, Australia, South Korea, Hong Kong, the Philippines, Malaysia, Brunei, Thailand, Indonesia, Vietnam and Cambodia, and applications have been filed or are in process in several other countries in the region. Our Pillar System is also approved for sale in the following countries in the Middle East: Israel, Turkey, Bahrain, Qatar and the United Arab Emirates. 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,

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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.

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 March 31, 2006, we had a total of 58 employees, consisting of 25 employees in sales and marketing, five employees in research and development (including regulatory and clinical affairs), 16 employees in operations and quality assurance, and 12 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 31, 2006:

Name	Age		Position
J. Robert Paulson, Jr.		49	President, Chief Executive Officer and Director
Christopher R. Geyen		35	Chief Financial Officer
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.

      Christopher R. Geyen was appointed Chief Financial Officer of our company in March 2006. Prior to joining us, Mr. Geyen served as Chief Financial Officer and Vice President for Acorn Cardiovascular, Inc. since 2003. From 1999 to 2003, Mr. Geyen was the Chief Financial Officer,

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Vice President, Secretary and Treasurer of Urologix, Inc., where he also served as the Controller from 1998 to 1999. Previously, Mr. Geyen held positions as Controller at SurVivaLink Corporation and as a Senior Auditor for Ernst & Young, LLP. Mr. Geyen received a Bachelor of Arts in Business Administration and Accounting from the University of St. Thomas and is a Certified Public Accountant.

      John J. Foster has served as our Senior Vice President of Commercial Operations since June 2004. From 2001 through 2004, 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 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.

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      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 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.

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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.

      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.

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      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;

•  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.

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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 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.

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      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.

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	$	41,941		408,500	$	6,338
	President, Chief Executive Officer and Director
John J. Foster(3)			2005	$	206,000	$	39,032		—	$	6,209
	Senior Vice President of		2004		100,000		24,000		100,000		2,505
	Commercial Operations
Philip E. Radichel			2005	$	163,112	$	23,179		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	$	23,399		—	$	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	$	21,795		—	$	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

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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 equal 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 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 options 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.

Christopher R. Geyen Employment and Change in Control Agreement

      On March 13, 2006, we entered into an employment and change in control agreement with Mr. Geyen, our Chief Financial Officer. The agreement does not provide a specific term for Mr. Geyen’s employment; rather, Mr. Geyen’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. Geyen’s or our option. The agreement provides that Mr. Geyen will receive a base salary of $185,000. Mr. Geyen also will be granted an option to purchase 200,000 shares of our common stock at an exercise price equal to fair market value on the date of grant pursuant to his agreement, plus an additional stock option grant after the completion of this offering to bring his ownership percentage up to nine-tenths of one percent on a fully diluted basis. Pursuant to his agreement, Mr. Geyen 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 for a yearly performance bonus target of 22% 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 by him and the company. Mr. Geyen’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 options will automatically vest. If a change of control occurs before the earlier of the completion of this offering or the next round of financing for the company, Mr. Geyen will receive a transaction bonus of $150,000. Further, if Mr. Geyen 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

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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. Geyen will be entitled to receive a transaction bonus equal to nine-tenths of one 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. Geyen’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.

John J. Foster Change in Control Agreement

      On March 13, 2006, we entered into a change in control agreement with Mr. Foster, our Senior Vice President of Commercial Operations. The agreement does not provide a specific term for Mr. Foster’s employment; rather, Mr. Foster’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. Foster’s or our option. The agreement provides that Mr. Foster will receive a base salary of $214,240. Pursuant to his agreement, Mr. Foster 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 25% 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 by him and the company. Mr. Foster’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. Further, if Mr. Foster 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 and twelve months of continued group health coverage. For purposes of Mr. Foster’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

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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.

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 31, 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 31, 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 31, 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 31, 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 31, 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 31, 2006		Number		Percentage		Number		Percentage
Executive Officers, Directors and Director-Nominees:
J. Robert Paulson, Jr.(4)		—		110,634		110,634		*		110,634		*
Christopher R. Geyen		—		—		—		*		—		*
John J. Foster(5)		—		45,830		45,830		*		45,830		*
Edward W. Numainville(6)		—		32,417		32,417		*		32,417		*
Phillip E. Radichel(7)		7,700		9,990		17,690		*		17,690		*
John P. Sopp(8)		—		24,357		24,357		*		24,357		*
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 (14 persons)(12)		5,554,109		749,644		6,303,753		52.5		6,303,753

*	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 110,634 shares that are currently exercisable or exercisable within 60 days of March 31, 2006.
(5)	Consists of options to purchase 45,830 shares that are currently exercisable or exercisable within 60 days of March 31, 2006.
(6)	Consists of options to purchase 32,417 shares that are currently exercisable or exercisable within 60 days of March 31, 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 31, 2006.
(8)	Consists of options to purchase 24,357 shares that are currently exercisable or exercisable within 60 days of March 31, 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 31, 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

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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.

(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 31, 2006.
(12)	See footnotes (4)-(11). Includes 749,644 shares of common stock issuable upon exercise of options and warrants currently exercisable or exercisable within 60 days of March 31, 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.

Equipment Use and Maintenance Fees

      In the past, we have paid Venturi I, LLC 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. Mark B. Knudson, Ph.D., the chairman of our board of directors, is the president and chief executive officer of Venturi I, LLC.

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 31, 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 31, 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 31, 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. The shares to be issued by us in this offering will be, when issued and paid for, validly issued, fully paid and nonassessable.

      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.

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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 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

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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 “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

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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 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

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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 Wells Fargo Shareowner Services.

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 31, 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

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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 Corporation 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 Corporation.
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

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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.

      At our request, the underwriters have reserved for sale, at the initial public offering price, up to                      shares of common stock being sold in this offering for our officers and directors and their families, and other persons associated with us who express an interest in purchasing these shares of common stock in this offering. The number of shares available for sale to the general public in the offering will be reduced to the extent these persons purchase reserved shares. Any reserved shares not purchased by these persons will be offered by the underwriters to the general public on the same terms as the other shares offered in this offering.

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.

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      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.

      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
Employment and Change in Control Agreement - J. Robert Paulson
Employment and Change in Control Agreement - Christopher Guyen
Change in Control Agreement - John Foster
Amended and Restated Convertible Promissory Note
Bridge Loan Agreement
Amendment No. 1 to the Bridge Loan Agreement
Form of Amended and Restated Promissory Note
Form of Amended and Restated Warrant to Purchase Common Stock
Consent of KPMG LLP
Consent of Director Nominee
Consent of Director Nominee

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

									ProForma
			2004						2005
			(Restated)			2005			(unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	2,258,270		$	3,396,577		$	3,396,577
	Short-term investments			6,174,007			247,734			247,734
	Accounts receivable, net of allowance for doubtful accounts of $11,910 and $59,897, respectively			274,008			1,239,885			1,239,885
	Related-party receivables			73,780			27,566			27,566
	Inventories			415,563			743,724			743,724
	Prepaid expenses			96,474			116,428			116,428
	Other current assets			4,599			54,127			54,127
		Total current assets		9,296,701			5,826,041			5,826,041
Machinery and equipment, net				361,937			425,909			425,909
Deferred debt issuance costs, net of accumulated amortization of $20,905 in 2005				—			80,740			80,740
Deferred offering costs				—			62,055			62,055
		Total assets	$	9,658,638		$	6,394,745		$	6,394,745
LIABILITIES, CONVERTIBLE PARTICIPATING PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
	Accounts payable		$	106,108		$	111,631		$	111,631
	Accrued expenses			470,909			645,451			645,451
	Accrued payroll and related expense			397,144			673,047			673,047
	Current portion of long-term debt, net of debt discount of $22,351 in 2005			—			337,536			337,536
		Total current liabilities		974,161			1,767,665			1,767,665
Long-term debt, net of debt discount of $44,701 in 2005				—			1,619,011			1,619,011
Other long-term liabilities				—			6,900			6,900
Preferred stock warrants subject to redemption				94,284			835,127			—
		Total liabilities		1,068,445			4,228,703			3,393,576
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 and no shares pro forma (unaudited) (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 and no shares pro forma (unaudited) (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 and no shares pro forma (unaudited) (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 and no shares pro forma (unaudited) (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’ equity (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 and 11,250,975 shares issued and outstanding pro forma (unaudited)			8,217			8,557			112,510
	Additional paid-in capital			652,608			3,187,885			43,127,916
	Deferred stock-based compensation			(166,185	)		(2,104,753	)		(2,104,753	)
	Accumulated deficit			(31,113,304	)		(38,134,504	)		(38,134,504	)
		Total common stockholders’ equity (deficit)		(30,618,664	)		(37,042,815	)		3,001,169
		Total liabilities, convertible participating preferred stock and stockholders’ equity (deficit)	$	9,658,638		$	6,394,745		$	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)  Unaudited Pro Forma Information

      The Company has filed a registration statement with the Securities and Exchange Commission to sell shares of its common stock to the public in an initial public offering. If the initial public offering is completed under the terms presently anticipated, all Series A, B, C and C-1 preferred stock and preferred stock warrants subject to redemption will automatically convert into Company common stock and common stock warrants, respectively, and the Company will effect a 1-for-2 reverse split of all issued and outstanding Company common stock. In addition, prior to the conversion of the preferred stock and preferred stock warrants, 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 Series C-1 preferred stock, the number of shares of common stock issuable upon conversion will increase by 2,557,692 shares. The number of common shares issuable pursuant to the Series C-1 preferred stock warrants will increase by 92,172 shares. An unaudited pro forma balance sheet as of December 31, 2005, adjusted for the assumed change in conversion price of Series C and Series C-1, the conversion of all Series A, B, C and C-1 preferred stock and preferred stock warrants subject to redemption, and the 1-for-2 reverse split is set forth in the accompanying balance sheet.

F-7

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

     (e)  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.

     (f)  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 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.

     (g)  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

F-8

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

     (h)  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

     (i)  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.

     (j)  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.

     (k)  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.

     (l)  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

F-9

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

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.

      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

     (m)  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

F-10

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

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

     (n)  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 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.

     (o)  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

F-11

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

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.

      Subsequent to the commencement of the initial public offering process, the Company determined that certain of the stock options granted for the years 2003, 2004 and 2005 were granted with exercise prices below the reassessed fair value of the common stock on the date of grant. The Company estimated the fair market value of its common stock based upon several factors, including progress and milestones attained in its business, sales of preferred stock, changes in valuation of existing comparable public companies, weighted probability analysis of fair value from an initial public offering, sale of the company, continued private company operations and company dissolution scenarios; and the expected valuation that the Company would obtain in an initial public offering. With respect to these options, we 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.

      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.

F-12

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

      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.

     (p)  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

     (q)  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

F-13

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

liabilities on the balance sheet under the caption “preferred stock warrants subject to redemption”. Warrants to purchase common stock are classified within equity.

     (r)  Research and Development Costs

      Research and development costs are charged to expense as incurred.

     (s)  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.

     (t)  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.

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

     (v)  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.

     (w)  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)

F-14

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

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 prospectively adopt SFAS 123(R) on January 1, 2006. Under the prospective method, compensation cost will be recognized based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date. The Company applied the intrinsic value method for awards granted before the effective date of SFAS 123(R).

      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. 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

F-15

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

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

(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

F-16

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

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.

     (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-17

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

     (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 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; $25,976 of government grant proceeds reclassified to research and development from other, net in 2003; and non-cash interest expense on the 2003 statement of cash flows did not include $445,671 of interest expense accrued during 2003 or $214,062 in amortization of debt discount. 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)(h)		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 principal due by December 31, 2008. The 5% final payment will be recognized ratably as

F-25

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

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
			(Restated)			(Restated)			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.

      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

      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

F-32

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

      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 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

F-33

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

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, 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.

F-34

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

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 25% discount conversion to the next defined round of financing 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, 2003, the put feature was marked to estimated fair value based on an independent valuation, resulting in a gain of $638,508. Prior to the conversion of the 2003 Bridge Notes into Series C-1 preferred stock in March 2004, the put was marked to estimated fair value resulting in the remaining fair value of the put of $870,692 being 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.

F-35

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

      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.

(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

F-36

RESTORE MEDICAL, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

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		24
Management’s Discussion and Analysis of Financial Condition and Results of Operations		27
Business		42
Management		62
Principal Stockholders		74
Related-Party Transactions		77
Description of Capital Stock		81
Shares Eligible for Future Sale		86
Material United States Federal Tax Consequences for Non-United States Holders of Our Common Stock		88
Underwriting		91
Legal Matters		94
Experts		94
Where You Can Find More Information		94
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.

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      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

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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
	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

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Exhibit
Number			Description
	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	.3A**	Employment and Change of Control Supplemental Agreement, dated as of March 15, 2006, 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.
	10	.16	Employment and Change in Control Agreement, dated as of March 13, 2006, by and between the Registrant and Christopher Geyen
	10	.17	Change in Control Agreement, dated as of March 13, 2006, by and between the Registrant and John Foster
	10	.18	Amended and Restated Convertible Promissory Note, issued October 31, 2002, as amended and restated on December 9, 2003, issued to Venturi I, LLC by the Registrant
	10	.19	Bridge Loan Agreement, dated June 16, 2003, by and among the Registrant and each of the investors that are a party thereto
	10	.20	Amendment No.1 to the Bridge Loan Agreement dated June 16, 2003 by and among the Registrant and the investors that are a party thereto, dated December 9, 2003
	10	.21	Form of Amended and Restated Promissory Note, dated December 9, 2003, issued by the Registrant pursuant to the Bridge Loan Agreement, dated June 16, 2003, by and among the Registrant and each of the investors that are a party thereto
	10	.22	Form of Amended and Restated Warrant to Purchase Common Stock, dated December 9, 2003, issued by the Registrant pursuant to the Bridge Loan Agreement, dated June 16, 2003, by and among the Registrant and each of the investors that are a party thereto

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Exhibit
Number			Description
	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
	99	.1	Consent of Director Nominee
	99	.2	Consent of Director Nominee

*	To be filed by amendment.
**	Previously filed.

 †  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 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.

      (3) For the purpose of determining liability under the Securities Act of 1933 to any purchaser, if the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a

II-6

registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

      (4) For the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities: The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be sellers to the purchaser and will be considered to offer or sell such securities to such purchaser:

      (A) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;

      (B) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;

      (C) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or their securities provided by or on behalf of the undersigned registrant; and

      (D) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.

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SIGNATURES

      Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Amendment No. 1 to 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 April 14, 2006.

RESTORE MEDICAL, INC.

By  /s/ J Robert Paulson, Jr.

J. Robert Paulson, Jr.

President and Chief Executive Officer

      Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to Registration Statement on Form S-1 has been signed by the following persons in the capacities indicated as of April 14, 2006.

Signature		Title
/s/ J. Robert Paulson, Jr. J. Robert Paulson, Jr.		President, Chief Executive Officer and Director (principal executive officer)
/s/ Christopher R. Geyen Christopher R. Geyen		Chief Financial Officer (principal accounting and financial officer)
* Ashley L. Dombkowski, Ph.D		Director
* Luke Evnin, Ph.D		Director
* Mark B. Knudson, Ph.D		Chairman
* Stephen Kraus		Director
* John Schulte		Director
*By:	/s/ J. Robert Paulson, Jr. J. Robert Paulson, Jr. As Attorney-in-Fact

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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.
10.3A**	Employment and Change of Control Supplemental Agreement, dated as of March 15, 2006, 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.
10.16	Employment and Change in Control Agreement, dated as of March 13, 2006, by and between the Registrant and Christopher Geyen
10.17	Change in Control Agreement, dated as of March 13, 2006, by and between the Registrant and John Foster
10.18	Amended and Restated Convertible Promissory Note, issued October 31, 2002, as amended and restated on December 9, 2003, issued to Venturi I, LLC by the Registrant
10.19	Bridge Loan Agreement, dated June 16, 2003, by and among the Registrant and each of the investors that are a party thereto

Exhibit
Number	Description
10.20	Amendment No. 1 to the Bridge Loan Agreement dated June 16, 2003 by and among the Registrant and the investors that are a party thereto, dated December 9, 2003
10.21	Form of Amended and Restated Promissory Note, dated December 9, 2003, issued by the Registrant pursuant to the Bridge Loan Agreement, dated June 16, 2003, by and among the Registrant and each of the investors that are a party thereto
10.22	Form of Amended and Restated Warrant to Purchase Common Stock, dated December 9, 2003, issued by the Registrant pursuant to the Bridge Loan Agreement, dated June 16, 2003, by and among the Registrant and each of the investors that are a party thereto
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
99.1	Consent of Director Nominee
99.2	Consent of Director Nominee

*  To be filed by amendment.

**  Previously filed.

†  Management contract or compensatory plan or arrangement.

EX-10.3

Exhibit 10.3A

EMPLOYMENT AND CHANGE IN CONTROL SUPPLEMENTAL AGREEMENT

     This Employment and Change in Control Supplemental Agreement (“Supplemental Agreement”) is made effective as of March 15, 2006, by and between Restore Medical Inc., a Minnesota corporation (the “Company”), and J. Robert Paulson, an individual resident of Minnesota (the “Employee”).

     WHEREAS, the parties executed an Employment and Change in Control Agreement (“Original Agreement”) on April 11, 2005;

     WHEREAS, the parties have decided it is in their mutual best interests to modify certain terms of that Original Agreement; and

     WHEREAS, the parties desire that the portions of the Original Agreement that are not expressly revised by this Supplemental Agreement remain in full effect and are not modified or abrogated by this Supplemental 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. The Term of Agreement section in the Original Agreement shall remain unmodified.

     2. Position and Duties. The Position and Duties section in the Original Agreement shall remain unmodified.

3. Compensation and BenefitsSection 3(b) of the Original Agreement is hereby modified in its entirety as follows:

(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 target equal to 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 for each new calendar year thereafter. If paid, the value of the additional performance incentive may be paid to Employee in some combination of cash and stock option grants, as established by the Board

of Directors, with any such amounts received by the Employee subject to all required withholdings, deductions, and tax reporting requirements.

     Compensation and Benefits section in the Original Agreement shall remain unmodified, except that Employee and the Company agree that the Company will, to the extent necessary and only to the extent necessary, modify the timing of delivery of severance benefits if the Company determines that the timing would subject the severance benefits to any additional tax or interest assessed under Section 409A of the Internal Revenue Code. In such event, the payments will occur as soon as practicable without causing the severance benefits to trigger such additional tax or interest under Section 409A of the Internal Revenue Code. Employee and the Company agree that such revision is in their mutual best interest, and the benefits of such revision to each party constitute sufficient consideration for such revision.

     4. Termination of Employment. The Termination of Employment section in the Original Agreement shall remain unmodified.

     5. Definitions. The Definitions section in the Original Agreement is modified as follows:

          (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; or

     (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.

2

          (b) “Termination” shall mean separation from service as defined by Section 409A of the Internal Revenue Code.

          (c) “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; or

     (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.

          (d) “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.

          (e) “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.

3

          (f) “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. The Successors and Binding Agreement section of the Original Agreement shall remain unmodified.

     7. Limitation of Damages. The Limitation of Damages section in the Original Agreement shall remain unmodified.

     8. Dispute Resolution. The Dispute Resolution section in the Original Agreement shall remain unmodified.

     9. Modification; Waiver. The Modification; Waiver section of the Original Agreement shall remain unmodified.

     10. Notice. The Notice section of the Original Agreement shall remain unmodified.

     11. Severability. The Severability section of the Original Agreement shall remain unmodified.

     12. Governing Law. The Governing Law section of the Original Agreement shall remain unmodified.

     13. Effect of Agreement; Entire Agreement. The Effect of Agreement; Entire Agreement section of the Original Agreement shall remain unmodified.

     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. Title: Chairman of the Board	J. Robert Paulson, Jr.

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EX-10.16 3 c01111a1exv10w16.htm EMPLOYMENT AND CHANGE IN CONTROL AGREEMENT - CHRISTOPHER GUYEN

EXHIBIT 10.16

EMPLOYMENT AND CHANGE IN CONTROL AGREEMENT

     This Employment and Change in Control Agreement (“Agreement”) is made effective as of March 13, 2006, by and between Restore Medical Inc., a Minnesota corporation (the “Company”), and Christopher Geyen, an individual resident of Minnesota (the “Employee”).

     WHEREAS, the Company desires to employ Employee as its Chief Financial Officer (“CFO”), 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 March 13, 2006, 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 CFO, subject and reporting to the President and Chief Executive Officer (“CEO”). 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 President and CEO 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. However, in the event Employee needs to complete certain open projects for Employee’s former employer, the Company will accommodate reasonable requests to complete these open projects as an employee of the Company, and during the Company’s normal business hours, through March 31, 2006 (“Transition Period”). Notwithstanding the foregoing, the Company

time that Employee uses to complete these projects shall not exceed fifteen (15) hours per week (without prior approval) during the Transition Period. 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 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 $15,416.67 monthly, which equates to an annualized Base Salary of $185,000.00, 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 will be reviewed by the Company in January 2007 and may be reviewed annually thereafter for potential increases on the basis of the Employee’s performance and the financial standing of the Company.

     (b) Signing Bonus. The Employee will be entitled to receive a signing bonus of $5,000, less all applicable withholdings, within five (5) business days of the date the Employee completes the Transition Period.

     (c) Additional Performance Incentive. In addition to Base Salary, the Employee will be eligible to receive an additional performance incentive pursuant to the Company’s Management Incentive Plan, 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 target equal to 22% of Base Salary, based on the level of attainment of corporate and individual performance goals as determined in the discretion of the Board of Directors. If paid, the value of the additional performance incentive may be paid to Employee in some combination of cash and stock option grants, as established by the Board of Directors, with any such amounts received by the Employee subject to all required withholdings, deductions, and tax reporting requirements.

     (d) Equity Participation.

     (i) The Board of Directors will approve a stock option grant to Employee to purchase up to 200,000 shares of the Company’s common stock in accordance with the Company’s 1999 Omnibus Stock Plan, as amended (the “Plan”) at an exercise price reflecting the fair market value of the Company’s common stock on the date of the grant as determined by the Board of Directors. Employee’s stock option grant will vest 25% at the end of his first year of employment, and 1/36^th of the remaining balance will vest each month thereafter for 36 months.

     (ii) In the event of an IPO, Employee will be eligible to receive an additional stock option grant of the Company’s common stock under the Plan as of the effective date of the IPO. The number of shares to be included in this

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second grant will be an amount, when added to the initial 200,000 shares grant (as adjusted for any stock split) defined above, which represents 0.9% of the fully diluted issued and outstanding capital stock of the Company (including all outstanding warrants to purchase common or preferred stock, and all issued stock options) following the IPO. The option price of this grant will reflect the fair market value of the Company’s common stock on the date of grant, as determined by the Board of Directors. In the event the IPO does not occur, the Employee will not be eligible to receive a second stock option grant in the amount described in this paragraph.

     (iii) In the event of a “Change in Control” (as defined in Section 6(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 6(c) below) or as the result of a “Constructive Termination” (as defined in Section 6(c) below), any remaining unvested portion of this stock option grant shall thereupon vest.

     (iv) 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.

     (v) 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.

     (e) 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.

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     (f) Special Transaction Bonus.

     (a) In the event a third party purchases all, or substantially all, of the stock or assets of the Company (a “Change of Control Transaction”) prior to the closing of the Company’s current IPO process or the Company’s next private equity financing, upon the closing of such transaction, Employee will receive a transaction bonus in the amount of $150,000. The right to receive this transaction bonus will expire upon the closing of the IPO or the completion of the next private equity financing.

     (b) In the event the current IPO process does not occur, the Company elects to raise capital in a private equity financing, and a Change of Control Transaction occurs subsequent thereto (but prior to any IPO of the Company), Employee will be entitled to a special transaction bonus. 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 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 (net of acquisition cost) to acquire shares of capital stock of the Company (“Employee’s Equity”), will result in Employee receiving total proceeds equal to nine-tenths of one percent (0.9%) of the net proceeds payable to the Company’s stockholders and holders of outstanding options and/or warrants in such Change in Control transaction. The right to receive this special cash transaction bonus will expire upon any IPO of the Company.

     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 continuation law and the Consolidated Omnibus Budget Reconciliation Act of 1986, 29 U.S.C. §§ 1161-1168; 26 U.S.C. §

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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 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

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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 6(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.  Section 409A Compliance. The Company will, to the extent necessary and only to the extent necessary, modify the timing of delivery of severance benefits if the Company determines that the timing would subject the severance benefits to any additional tax or interest assessed under Section 409A of the Internal Revenue Code. In such event, the payments will occur as soon as practicable without causing the severance benefits to trigger such additional tax or interest under Section 409A of the Internal Revenue Code.

     6. 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; or

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     (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.

     (b) “Termination” shall mean separation from service as defined by Section 409A of the Internal Revenue Code.

     (c) “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; or

     (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.

     (d) “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

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     (iv) Any criminal indictment, presentment, or conviction for a felony, whether or not the Company is the victim of such offense.

     (e) “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.

     (f) “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.

     7. 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.

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     8. 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 9 and 13 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.

     9. 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 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 8 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 9 shall have no application to claims by the Company asserting violation of or seeking to enforce, by injunction or otherwise, the terms of Company’s 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.

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     10. 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.

     11. 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 listed below:

If to:	Restore Medical, Inc.
	2800 Patton Road
	St. Paul, MN 55113
	Attention: Board of Directors
If to:	Employee
	Christopher Geyen
	2528 Wood Duck Trail
	Shakopee, MN 55379

     Either party hereto may change its address for purposes of this Section 11 by giving 15 days’ prior written notice to the other party hereto.

     12. 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.

     13. 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.

     14. 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

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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’ Nondisclosure Agreement, as incorporated by reference in Section 9(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/ J. Robert Paulson, Jr.	/s/ Christopher Geyen
	Name: J. Robert Paulson, Jr.	Christopher Geyen
	Title: President & CEO

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EX-10.17 4 c01111a1exv10w17.htm CHANGE IN CONTROL AGREEMENT - JOHN FOSTER

EXHIBIT 10.17

CHANGE IN CONTROL AGREEMENT

     This Change in Control Agreement (“Agreement”) is made effective as of March 13, 2006, by and between Restore Medical Inc., a Minnesota corporation (the “Company”), and John Foster, an individual resident of Minnesota (the “Employee”).

     WHEREAS, the Company desires to employ Employee as its Senior Vice President of Commercial Operations, 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 March 13, 2006, 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 Senior Vice President of Commercial Operations, subject and reporting to the President and Chief Executive Officer (“CEO”). 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 President and CEO 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 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 $17,853.33 monthly, which equates to an annualized Base Salary of $214,240.00, 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 the Company’s Management Incentive Plan, as such plan may be amended from time to time. Employee’s target bonus under the Management Incentive Plan shall be 25% of Base Salary. 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.

     (c) 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.

     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

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be entitled to receive six (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 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 twelve (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 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

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amounts already vested or earned by but unpaid to the Employee as of the date of termination, the Employee shall be entitled to receive twelve (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 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 twelve (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 6(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.  Section 409A Compliance. The Company will, to the extent necessary and only to the extent necessary, modify the timing of delivery of severance benefits if the Company determines that the timing would subject the severance benefits to any additional tax or interest assessed under Section 409A of the Internal Revenue Code. In such event, the payments will occur as soon as practicable without causing the severance benefits to trigger such additional tax or interest under Section 409A of the Internal Revenue Code.

     6. 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

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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; or

     (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.

     (b) “Termination” shall mean separation from service as defined by Section 409A of the Internal Revenue Code.

     (c) “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; or

     (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.

     (d) “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;

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     (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.

     (e) “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.

     (f) “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.

     7. 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 twelve (12) months following a Change in Control, without Cause.

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     (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.

     8. 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 9 and 13 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.

     9. 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 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 8 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).

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     (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 the 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.

     10. 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.

     11. 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 listed below:

If to:	Restore Medical, Inc.
	2800 Patton Road
	St. Paul, MN 55113
	Attention: Board of Directors
	If to:	Employee
		9549 Hillingdon Rd
		Woodbury, Minnesota 55125

     Either party hereto may change its address for purposes of this Section 11 by giving 15 days’ prior written notice to the other party hereto.

     12. 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.

     13. 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.

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     14. 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 9(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/ J. Robert Paulson, Jr.	/s/ John Foster
	Name: J. Robert Paulson, Jr.	John Foster
	Title: President & CEO

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EX-10.18 5 c01111a1exv10w18.htm AMENDED AND RESTATED CONVERTIBLE PROMISSORY NOTE

EXHIBIT 10.18

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO (1) REGISTRATION IN COMPLIANCE WITH SUCH ACT AND SUCH STATE LAWS OR (2) AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED.

RESTORE MEDICAL, INC.

CONVERTIBLE PROMISSORY NOTE
 

$675,000.00 October 31, 2002
as amended June 12, 2003 and December 9, 2003

     For Value Received, the undersigned Restore Medical, Inc. (f/k/a Pi Medical, Inc.), a Minnesota corporation (the “Company”), hereby promises to pay to the order of Venturi I, LLC (“Holder”), at its principal office at 2800 Patton Road, St. Paul, Minnesota 55113, the principal sum of Six Hundred Seventy-Five Thousand and 00/100 Dollars ($675,000.00). Interest shall be payable on the unpaid principal balance of this Note, computed on the basis of actual number of days elapsed and a year of 360 days, from the date hereof at the rate of 12% per annum. Unless converted as provided below, the outstanding principal of, and interest accrued on, this Note will mature and shall be due and payable on December 31, 2003 (the “Maturity Date”). This Note may be prepaid, at the option of the Company, without penalty in whole or in part at any time and from time to time after issue and prior to the Maturity Date.

     In the event of an equity financing by the Company, all of the outstanding principal of and interest accrued on this Note shall automatically convert into the securities offered in such financing, at a conversion price equal to the offering price per share in such financing.

     The Company shall pay all expenses, court costs and reasonable attorneys’ fees which may be incurred in connection with the collection of or attempts to collect any amounts due under this Note.

     The Company hereby waives presentment of this Note, demand, protest, dishonor and notice of dishonor.

     This Note shall be governed by the laws of the State of Minnesota without regard to its conflicts of laws rules.

     Amendment. This Note is intended to amend by substitution the Note dated as of October 31, 2002, as amended June 12, 2003, made by the Company in favor of Venturi I, LLC.

RESTORE MEDICAL, INC.
By	/s/ Susan L. Critzer
	Name:	Susan L. Critzer
	Title:	President

EX-10.19 6 c01111a1exv10w19.htm BRIDGE LOAN AGREEMENT

EXHIBIT 10.19

RESTORE MEDICAL, INC.

BRIDGE LOAN AGREEMENT

     THIS BRIDGE LOAN AGREEMENT (this “Agreement”) is made and entered into as of June 16, 2003, by and among Restore Medical, Inc., a Minnesota corporation (the “Company”), and each of the investors listed on Schedule A hereto (the “Purchasers”).

     WHEREAS, the Company wishes to sell and each of the Purchasers desires to purchase subordinated convertible notes and warrants to purchase shares of the Company’s common stock, $.01 par value (“Common Stock”);

     NOW, THEREFORE, the parties hereto hereby agree as follows:

     1. Authorization of the Notes and Warrants. The Company will have authorized, on or before the First Closing (as defined herein), the issuance and sale of subordinated convertible notes up to an aggregate principal amount of $5,374,462.49, substantially in the form attached hereto as Exhibit A (collectively, the “Notes”), and warrants to purchase up to an aggregate of 224,000 shares of the Company’s Common Stock, substantially in the form attached hereto as Exhibit B (collectively, the “Warrants”).

     2. Sale and Purchase of Notes and Warrants. Subject to the terms and conditions hereof, the Company will issue and sell to each Purchaser, and each Purchaser will purchase from the Company: (a) up to the principal amount of Notes equal to the amount of committed capital set forth opposite the name of each such Purchaser on Schedule A attached hereto, less the “Purchase Price of Warrant” (as defined below), and (b) in exchange for the Purchase Price of Warrant, a Warrant to purchase the number of shares of Common Stock set opposite the name of each such Purchaser at an exercise price of $0.55 per share. “Purchase Price of Warrant” shall mean the price paid by the Purchasers to receive each Warrant, which amount shall be equal to the amount set forth opposite the name of each Purchaser on Schedule A attached hereto. The Notes and the Warrants are hereinafter collectively referred to as the “Securities.” Each Note shall be convertible into shares of the Company’s equity securities issued in a Qualifying Financing (as defined below) pursuant to Section 7.1 below and shall be secured by assets of the Company as described in Section 3.2(c) below, the Notes, and the Security Agreement dated as of the date hereof and attached hereto as Exhibit C.

     3. Closing Date; Delivery and Payment.

          3.1. Closing Date. The first closing of the purchase and sale of the Securities hereunder (the “First Closing”), as well as each subsequent closing of the purchase and sale of any Securities pursuant to the exercise of the Company’s call rights set forth in Section 3.2(b) below (each, a “Subsequent Closing”), will be held at the Company’s principal offices or at the offices of Dorsey & Whitney LLP on the dates agreed upon by the Company and Purchasers purchasing a majority in interest of the aggregate principal amount of the Notes.

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          3.2. Delivery and Payment.

          (a) At the First Closing, the Company shall deliver to each Purchaser a Note registered in the name of each Purchaser, representing fifty percent (50%) of the aggregate principal amount set forth opposite the name of such Purchaser on Schedule A attached hereto, less the Purchase Price of Warrant for such Purchaser, together with a Warrant to purchase the number of shares of Common Stock set forth opposite the name of such Purchaser on Schedule A attached hereto. At the First Closing, each Purchaser shall pay to the Company by check or wire transfer an amount equal to fifty percent (50%) of the aggregate principal amount set forth opposite the name of such Purchaser on Schedule A attached hereto.

          (b) The Company shall have the right to call the remaining aggregate principal amount of Notes, in minimum increments of 25% of the aggregate principal amount of the Notes, on one or more dates subsequent to the First Closing, but in any event no later than August 30, 2003 (each a “Call”). In order to call any of the remaining aggregate principal amount of the Notes, the Company shall provide at least fourteen (14) days’ notice to the Purchasers, at the address shown on Schedule A attached hereto, substantially in the form of notice attached hereto as Exhibit D (the “Call Notice”); provided, however, (x) that each respective Call shall have been separately approved by the disinterested members of the Company’s Board of Directors subsequent to the date hereof and (y) there shall not have been a Material Adverse Effect (as defined herein) on the Company subsequent to the date hereof. With respect to each Call, the Company shall deliver the Call Notice by confirmed facsimile transmission or overnight courier service to the Purchasers stating (i) its intention to call additional funds, (ii) the amount of additional funds to be called, (iii) the date on which the additional funds are to be called, and (iv) the purpose for which such additional funds are being called. At each Subsequent Closing, the Company shall deliver to each Purchaser a Note registered in the name of each Purchaser, representing its pro rata share of the aggregate amount of Notes to be issued at such Subsequent Closing. For the purposes of this Agreement, “Material Adverse Effect” means a material adverse effect on the assets, business, properties, operations or condition (financial or otherwise) of the Company, or a material adverse effect on the ability of the Company to perform its obligations under this Agreement; provided however, that in determining whether there has been a Material Adverse Effect, any adverse effect principally attributable to the following shall be disregarded: (I) general political, economic, national security, business, industry or financial market conditions; (II) expenditures by the Company in the ordinary course of business consistent with past practices and reasonable expenditures by the Company in connection with the transactions contemplated by this Agreement; or (III) the taking of any action required by this Agreement.

          (c) The amounts due for principal and accrued interest under the Notes shall be secured by a first priority lien on those specified assets of the Company as provided in a Security Agreement in form and substance mutually acceptable to the Company and the Purchasers; provided, however, that the parties hereto acknowledge and agree that such lien shall be junior to the Comerica Bank-California (“Comerica”) senior security interest in certain assets of the Company, pursuant to the terms and conditions set forth in that certain Loan and Security Agreement dated as of December 19, 2002 between the Company and Comerica; provided further, that the Purchasers and the Company agree and acknowledge that the Purchaser’s

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security interest in assets of the Company contemplated by this Agreement and the Security Agreement shall terminate upon conversion or repayment of the Notes in accordance with the terms and conditions set forth in Section 7 of this Agreement.

     4. Definitions. Unless the context otherwise requires, the terms defined in this Section 4 shall have the meanings herein specified for all purposes of this Agreement.

     “Articles” means the Amended and Restated Articles of Incorporation of the Company attached hereto as Exhibit E.

     “Code” means the Internal Revenue Code of 1986, as amended, and the Treasury Regulations thereunder.

     “Commission” means the Securities and Exchange Commission.

     “Material Adverse Effect” shall mean a material adverse effect upon the business, operations or condition (financial or otherwise) of the Company, or a material adverse effect that otherwise renders the Company unable to perform its ongoing obligations.

     “Person” means any natural person, corporation, limited liability company, association, partnership (general or limited), joint venture, proprietorship, governmental agency, trust, estate, association, custodian, nominee or any other individual or entity, whether acting in an individual, fiduciary, representative or other capacity.

     “Securities Act” means the Securities Act of 1933, as amended from time to time.

     5. Representations and Warranties by the Company. Except as disclosed on the Disclosure Schedule to this Agreement (the “Disclosure Schedule”), the Company represents and warrants to the Purchasers that:

          5.1. Organization and Standing. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Minnesota and has the requisite corporate power and authority to own its properties and to carry on its business as now being conducted and presently proposed to be conducted. The Company has no subsidiaries or direct or indirect equity interest in any other Person. The Company is duly qualified to do business as a foreign corporation in all jurisdictions in which the failure to do so could reasonably be expected to result in a Material Adverse Effect.

          5.2. Articles. As of the date of the First Closing, the effective articles of incorporation of the Company shall be in the form set forth in Exhibit E to this Agreement.

          5.3. Notes and Warrants. The Notes and Warrants, when issued and paid for pursuant to the terms of this Agreement, will be duly and validly authorized, issued and outstanding, fully paid, nonassessable and free and clear of all pledges, liens, encumbrances and restrictions, except as set forth in Section 6.2 hereof. The shares of Common Stock issuable upon conversion of the Warrants have been reserved for issuance and, when issued upon such

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conversion, will be duly and validly authorized, issued and outstanding, fully paid, nonassessable and free and clear of all pledges, liens, encumbrances and restrictions, except as set forth in Section 6.2 hereof.

          5.4. Securities Laws. Based in part upon the representations and warranties of the Purchasers contained in Section 6.1 of this Agreement, no consent, authorization, approval, permit or order of or filing with any governmental or regulatory authority is required under current laws and regulations in connection with the execution and delivery of this Agreement or the offer, issuance, sale or delivery of the Securities, other than the qualifications and filings under certain applicable state securities laws, which qualifications and filings have been or will be effected as a condition of such sales or conversions. The Company has not, directly or through an agent, offered the Securities or any similar securities for sale to, or solicited any offers to acquire such securities from, Persons other than the Purchasers and other accredited investors. Under the circumstances contemplated hereby, the offer, issuance, sale and delivery of the Securities will not under current laws and regulations require compliance with the prospectus delivery or registration requirements of the Securities Act. The shares of Common Stock issuable upon conversion of the Warrants will be issued in compliance with all applicable federal and state securities laws.

          5.5. Corporate Acts and Proceedings. The execution and delivery of this Agreement has been duly authorized by all requisite corporate action on the part of the Company, its officers, directors and stockholders and this Agreement has been duly executed and delivered by an authorized officer of the Company. This Agreement is a valid and binding obligation of the Company enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium, reorganization or other similar laws affecting the enforcement of creditors’ rights generally and as to limitations on the enforcement of the remedy of specific performance and other equitable remedies. The requisite corporate action necessary to the authorization, creation, issuance, execution and delivery of the Securities has been taken by the Company, its officers, directors and stockholders.

          5.6. Litigation. There are no legal actions, suits, arbitrations or other legal, administrative or governmental proceeding or investigation pending or, to the knowledge of the Company, threatened against the Company, or any officer or director of the Company relating to their duties under such position in the Company, or the Company’s properties, assets or business, or that questions the validity of this Agreement or the right of the Company to enter into this Agreement, or to consummate the transactions contemplated hereby, and neither the Company nor any of its officers is aware of any facts which might result in or form the basis for any such action, suit or other proceeding. The Company is not in default with respect to any judgment, order or decree of any court or any governmental agency or instrumentality.

          5.7. Patents and Other Intangible Rights. The Company has sufficient title and ownership of or exclusive licenses to all patents, trademarks, service marks, trade names, domain names, copyrights, trade secrets, information, proprietary rights and processes necessary for its business as now conducted and as proposed to be conducted without any conflict with or infringement of the rights of others, except where failure to do so would not reasonably be expected to have a Material Adverse Effect. The Disclosure Schedule contains a complete list of

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patents and pending patent applications of the Company. There are no outstanding options, licenses or agreements of any kind relating to the foregoing, nor is the Company bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, service marks, trade names, domain names, copyrights, trade secrets, licenses, information, proprietary rights and processes of any other Person. The Company has not received any communications alleging that the Company has violated or, by conducting its business as proposed, would violate any of the patents, trademarks, service marks, trade names, copyrights or trade secrets or other proprietary rights of any other Person. The Company is not aware that any of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of his or her best efforts to promote the interests of the Company or that would conflict with the Company’s business as proposed to be conducted. Neither the execution nor delivery of this Agreement, the carrying on of the Company’s business by the employees of the Company nor the conduct of the Company’s business as proposed, will, to the best of the Company’s knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any of such employees is now obligated. The Company does not believe it is or will be necessary to utilize any inventions of any of its employees (or people it currently intends to hire) made prior to or outside the scope of their employment by the Company.

          5.8. Capital Stock. Immediately prior to the First Closing, the authorized capital stock of the Company shall consist of 15,500,000 shares, 775,000 of which shall have been designated as Series A Convertible Preferred Stock (the “Series A Preferred Stock”), of which 750,000 shares are issued and outstanding, 4,500,000 of which shall have been designated as Series B Convertible Preferred Stock (the “Series B Preferred Stock”), of which 4,185,411 shares are issued and outstanding, 8,500,000 shares of which have been designated as Common Stock, of which 1,633,525 shares are issued and outstanding, and 1,725,000 of which are undesignated shares of capital stock. No person holds or is entitled to any outstanding subscriptions, warrants, options, calls, convertible securities, commitments of sale or similar rights to purchase or otherwise acquire any shares of, or any security convertible into or exchangeable for, the capital stock of, or other ownership interest in, the Company, except for (a) the conversion privileges of the Series A Preferred Stock and the Series B Preferred Stock and (b) currently outstanding options and warrants to purchase 1,301,799 shares of capital stock of the Company. The Company is not a party or subject to any agreement or understanding, and, to the Company’s knowledge, there is no agreement or understanding between any Persons, which affects or relates to the voting or giving of written consents with respect to any capital stock or by a director of the Company.

          5.9. No Conflict. Neither the authorization, execution, delivery or performance of, or compliance with, this Agreement nor the consummation of the transactions contemplated hereby will, with or without the giving of notice or passage of time, (a) result in any breach of, constitute a default under or result in the imposition of any pledges, liens, encumbrances or restrictions upon any asset or property of the Company pursuant to any agreement or other instrument to which the Company is a party or by which it or any of its properties is bound or affected or (b) violate its articles of incorporation or its bylaws.

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          5.10. No Brokers or Finders. No Person has, or will have, as a result of any acts or omission of the Company, any rights, interest or valid claim against the Company or the Purchaser for any commission, fee or other compensation as a finder or broker in connection with the transactions contemplated by this Agreement. The Company will indemnify and hold the Purchaser harmless against any and all liability with respect to any such commission, fee or other compensation which may be payable or determined to be payable by the Company in connection with the transactions contemplated by this Agreement.

     6. Representations and Warranties of the Purchasers; Restrictions on Transfer.

          6.1. Representations and Warranties of the Purchasers. Each Purchaser represents and warrants that:

     (a) The Securities being acquired by such Purchaser hereunder are being purchased for such Purchaser’s own account and not with the view to, or for resale in connection with, any distribution or public offering thereof within the meaning of the Securities Act. Such Purchaser understands that the Securities have not been registered under the Securities Act by reason of their contemplated issuance in transactions exempt from the registration and prospectus delivery requirements of the Securities Act pursuant to Section 4(2) thereof, and that the reliance of the Company and others upon this exemption from such registration is not presently available pursuant to Rule 144 promulgated under the Securities Act by the Commission and that in any event such Purchaser may not sell the Securities pursuant to Rule 144 prior to the expiration of a one-year period after such Purchaser has acquired the Securities.

     (b) The principal office or residence of such Purchaser is the address set forth on Schedule A attached hereto. Such Purchaser is an “accredited investor” as that term is defined in Regulation D promulgated under the Securities Act, and has such knowledge and experience in financial and business matters that such Purchaser is capable of evaluating the merits and risks of the investment to be made hereunder by such Purchaser. Such Purchaser has had access to all of the Company’s material books and records and the Company has made available to such Purchaser at a reasonable time prior to execution of this Agreement the opportunity to ask questions and receive answers concerning the terms and conditions of the sale of securities contemplated by this Agreement and to obtain any additional information as may be necessary to verify the accuracy of information furnished to such Purchaser by the Company.

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     (c) This Agreement has been duly authorized by the requisite action of such Purchaser and has been duly executed and delivered by such Purchaser, and is a valid and binding obligation of such Purchaser enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium, reorganization or other similar laws affecting the enforcement of creditors’ rights generally and as to limitations on the enforcement of the remedy of specific performance and other equitable remedies. No approval of or consent of any Person is or was required to be obtained by such Purchaser for the authorization or execution of this Agreement or the consummation of the transactions contemplated by this Agreement.

     (d) No Person has or will have, as a result of any act or omission by such Purchaser, any right, interest or valid claim against the Company for any commission, fee or other compensation as a finder or broker, or in any similar capacity, in connection with the transactions contemplated by this Agreement. Such Purchaser will indemnify and hold the Company harmless against any and all liability with respect to any such commission, fee or other compensation which may be payable or determined to be payable in connection with the transactions contemplated by this Agreement.

     6.2. Restrictions on Transfer.

     (a) In addition to any legends required under state securities laws, each certificate representing the Securities shall be endorsed with substantially the following legend:

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”). THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR EVIDENCE SATISFACTORY TO THE COMPANY OF AN APPLICABLE EXEMPTION FROM REGISTRATION UNDER THE ACT OR COMPLIANCE WITH RULE 144 UNDER SUCH ACT.

Upon the conversion of any of the Securities, unless the Company receives an opinion of counsel reasonably satisfactory to the Company to the effect that a transfer of the securities issuable upon conversion of the Securities (the “Conversion Stock”) may be made without registration, or unless such Conversion Stock is being disposed of pursuant to a registration under the Securities Act, substantially the same legend shall be endorsed on the certificate evidencing such Conversion Stock.

     (b) Any legend endorsed on a certificate evidencing Securities pursuant to Section 6.2(a) hereof shall be removed, and the Company shall issue a certificate without such legend to the holder of the Securities, if the Securities are being disposed of pursuant to a registration under the Securities Act or if such holder provides the Company with an opinion of counsel reasonably satisfactory to the Company to the effect that a transfer of the Securities may be made without registration.

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     (c) Notwithstanding the provisions of paragraphs (a) and (b) above, no such registration statement or opinion of counsel shall be necessary for (i) a transfer by a Purchaser that is a partnership to a partner of such partnership or a retired partner of such partnership who retires after the date hereof, or to the estate of any such partner or retired partner, (ii) a transfer by a Purchaser that is an LLC to a member of such LLC or to the estate of any member, (iii) the transfer by gift, will or intestate succession of any Purchaser to his or her spouse or to the siblings, lineal descendants or ancestors of such Purchaser or his or her spouse, or a trust primarily for the benefit of such persons, (iv) the transfer by a Purchaser to a corporation, limited liability company or limited partnership, at least 80% of the equity interests of which are owned by such Purchaser if the transferee agrees in writing to be subject to the terms hereof to the same extent as if he or she were an original Purchaser hereunder or (v) the transfer by a Purchaser to an affiliate of or successor trustee to such Purchaser; provided, that in each of the foregoing, such transfer is made in accordance with all applicable laws.

     7. Conversion of Notes; Repayment Provisions; Events of Default.

          7.1. Automatic Conversion. The principal amount payable pursuant to the Notes, together, at the election of each Purchaser, with any interest thereon, shall automatically be converted into fully paid and nonassessable shares of the Company’s equity securities issued in a Qualifying Financing. A “Qualifying Financing” means an equity financing pursuant to one or more private placements of equity securities resulting in aggregate gross proceeds of at least $10,000,000, excluding the amount of any Notes converted in such financing. The price at which each share is offered in such private placement shall be deemed the “Sales Price” (subject to customary adjustments for stock splits, stock dividends, recapitalizations or other similar events) for purposes of this Agreement. The number of shares of equity securities to which the Purchasers shall be entitled upon such conversion shall equal the principal amount owing under the Notes (together with any interest thereon, if the Purchasers elect to convert such interest), divided by seventy-five percent (75%) of the Sales Price.

          7.2. Mechanics of Conversion. Upon conversion of the Notes under Section 7.1, (a) the principal amount of the Notes automatically shall be converted as provided herein; (b) if the Purchasers do not elect to have the accrued interest on the Notes converted into equity securities pursuant to Section 7.1, such interest shall be paid in cash by the Company to the holders of the Notes upon conversion of the principal amount of the Notes; (c) the Purchasers shall deliver the Notes to the Company for cancellation; and (d) this Agreement and the Notes shall immediately become null, void, and of no further force and effect regardless of their delivery to and receipt by the Company.

          7.3. No Fractional Shares. No fractional shares shall be issued upon the conversion of the Notes. If the conversion of the Notes results in any fraction of a share, the Company shall make payment in cash for such fractional interest, calculated on the basis of 75% of the Sales Price per full share, or as may be adjusted pursuant to the terms hereof.

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          7.4 Repayment of Notes at Maturity Date. The aggregate principal amount of the Notes, together with any interest accrued thereon, shall be due and payable on December 31, 2003 (the “Maturity Date”), provided the Company has not consummated a Qualifying Financing prior to the Maturity Date. The Company shall not be permitted to prepay any principal amount of the Notes or any interest accrued thereon.

          7.5 Repayment of Notes upon Liquidation. Notwithstanding the foregoing, in the event of (a) any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, (b) any consolidation, merger or sale of all or substantially all of the assets of the Company, or (c) any transfer of more than fifty percent (50%) of the voting power of the Company, in each case prior to the earlier of the consummation of a Qualifying Financing or the Maturity Date, the Purchasers shall be entitled to receive in cash upon such event an amount equal to (x) the product of the principal amount accrued under the Notes multiplied by three, plus (y) the amount of any interest accrued on the Notes.

          7.6 Events of Default. The unpaid principal amount of each Note, together with accrued interest thereon, shall become immediately due and payable without any action on the part of the holder thereof upon the happening of any of the following events (each an “Event of Default”):

     (a) if default shall be made by the Company in the payment of interest on or principal of any of the Notes when and as the same shall become due and payable; or

     (b) if default shall be made in the due performance or observance of any other expressed or implied covenant, agreement or provision of the Notes or of this Agreement and such default shall have continued uncured for a period of thirty days after written notice thereof to the Company from the holder of any outstanding Note; or

     (c) if the Company shall:

     (i) admit in writing its inability to pay its debts generally as they become due; or

     (ii) file a petition in bankruptcy or for reorganization or for the adoption of an arrangement under the Bankruptcy Act (as now or in the future amended) or seeking similar relief or consent to such a filing against it or involuntarily have such a petition filed against it which is not dismissed or stayed within 30 days; or

     (iii) make an assignment for the benefit of its creditors; or

     (iv) consent to the appointment of a receiver for all or a substantial part of its property; or

     (v) be adjudicated a bankrupt; or

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     (vi) have entered against it a court order appointing a receiver or trustee for all or a substantial part of its property without its consent, which order shall not be vacated, set aside or stayed within 30 days from the date of entry; or

     (vii) have a court or competent jurisdiction order the assumption or custody or sequestration of all or substantially all of its property, which custody or sequestration shall not be suspended or terminated within 30 days from its inception.

     8. Affirmative Covenants of the Company. The Company covenants and agrees that, so long as any of the Notes remain outstanding:

          8.1. Corporate Existence. The Company will maintain its corporate existence in good standing.

          8.2. Books of Account and Reserves. The Company will keep, and will cause any subsidiary to keep, books of record and account in which full, true and correct entries are made of all of its and their respective dealings, business and affairs, in accordance with generally accepted accounting principles. For the year ending December 31, 2003, the Company will employ certified public accountants who are “independent” within the meaning of the accounting regulations of the Commission. At such time, the Company will have annual audits made by such independent public accountants in the course of which such accountants shall make such examinations, in accordance with generally accepted auditing standards, as will enable them to give such reports or opinions with respect to the financial statements of the Company and its subsidiaries as will satisfy the requirements of the Commission in effect at such time with respect to reports or opinions of accountants. At such time as independent public accountants are employed by the Company, management will request such independent public accountants to issue to the Company a management letter of recommendations in connection with each annual audit of the financial statements of the Company. In the event the services of the independent public accountants are terminated, the Company will promptly notify the Purchaser of such termination and will request such independent public accountants to send a letter to the Purchaser advising them in the detail requested by them of the reasons for the termination of their services.

          8.3. Furnishing of Financial Statements and Information. So long as a Purchaser and its affiliates collectively hold at least 20% of the issued and outstanding Notes, the Company will deliver to such Purchaser:

     (a) within five days of their availability, but in any event within 45 days after the close of each month, (i) an unaudited consolidated balance sheet of the Company and any subsidiaries as of the end of such month and the corresponding balance sheet from the budget as of such month, (ii) the related unaudited combined operating statements for such month and the fiscal year to date and the corresponding statements from the budget for such month and the fiscal year to date, (iii) the related consolidated statement of cash flows for the current month, all in reasonable detail, subject to year-end adjustments, and (iv) the monthly reporting form in a form to be agreed upon by the parties, which reporting form may, in the Purchasers’ discretion, take the place of the foregoing items (i), (ii) and (iii);

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     (b) within five days of their availability, but in any event within 90 days after the end of each fiscal year, a consolidated balance sheet of the Company and any subsidiaries, as of the end of such fiscal year, together with the related consolidated statements of income and retained earnings and statements of cash flows for such fiscal year, setting forth in comparative form figures for the previous fiscal year, all in reasonable detail and duly certified by the Company’s independent public accountants, which accountants shall have given the Company an opinion, unqualified as to the scope of the audit, regarding such statements;

     (c) within fifteen days after the Company learns of the commencement or threatened commencement of any material suit, legal or equitable, or of any material administrative, arbitration or other proceeding against the Company or its business, assets or properties, written notice of the nature and extent of such suit or proceeding;

     (d) promptly after the submission thereof to the Company, copies of the management letter and any other reports or recommendations submitted by independent public accountants in connection with any annual or interim audit or the accounts of the Company or any of its subsidiaries made by such accountants;

     (e) with reasonable promptness, such other financial data relating to the business, affairs and financial condition of the Company and any subsidiaries as is available to the Company and as from time to time the Purchasers may reasonably request.

          The Company’s obligations under paragraphs 8.3(a) through (e) shall terminate upon the earlier of (i) conversion or repayment of the Notes and (ii) the closing of a public offering pursuant to an effective registration statement on Form S-1 (or any successor form) under the Securities Act for an offering price per share of not less than $3.00 and with gross proceeds of at least $20,000,000.

          8.4. Inspection and Attendance. So long as a Purchaser and its affiliates collectively hold at least 20% of the issued and outstanding Notes, the Company will permit such Purchaser and any of its partners, officers or employees, or any outside representatives designated by the Purchaser and reasonably satisfactory to the Company, to attend meetings of the Board of Directors as an observer and to visit and inspect at the expense of such Purchaser, except for any expenses required to be borne by the Company under Minnesota Statutes, Section 302A.461, as now in effect or hereafter amended or succeeded, any of the properties of the Company or its subsidiaries, including their books and records (and to make photocopies thereof or extracts therefrom), and to discuss their affairs, finances and accounts with their officers, except with respect to trade secrets and similar confidential information, all to such reasonable extent and at such reasonable times and intervals as such Purchaser may reasonably request without disruption of the Company’s operations.

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          8.5 Management Incentive Plan. Prior to the First Closing, the Company shall cause its Board of Directors to adopt a management incentive plan (the “Incentive Plan”) substantially in the form attached hereto as Exhibit F.

     9. Negative Covenants of the Company. So long as the Purchasers and their affiliates collectively hold at least 20% of the aggregate principal amount of the Notes then issued pursuant to this Agreement and which remain outstanding, without the approval of holders of a majority of the outstanding aggregate principal amount of the Notes, the Company will be limited and restricted as follows:

          9.1. Consolidation, Merger Acquisition, etc. Neither the Company nor any subsidiary will sell, lease or otherwise dispose of all or substantially all of its assets, or consolidate with or merge into any other corporation or entity, or permit any other corporation or entity to consolidate or merge into it, except that any subsidiary may merge into another subsidiary or the Company.

          9.2. Capital Expenditures and Leases. Neither the Company nor any subsidiary will pay or incur aggregate expenditures exceeding $100,000 for any one transaction or exceeding the aggregate amounts set forth in the annual plan approved by the Board of Directors without the prior approval of the Board of Directors.

          9.3. Other Restrictions. The Company and any subsidiary will not:

     (a) guarantee, endorse or otherwise be or become contingently liable in connection with the obligations, securities or dividends of any Person other than the Company or a subsidiary, except that the Company and any subsidiary may endorse negotiable instruments for collection in the ordinary course of business;

     (b) make loans or advances to any Person (including without limitation to any officer, director or stockholder of the Company or any subsidiary), except advances to suppliers made in the ordinary course of business; or

     (c) purchase or invest in the stock or obligations of any other Person other than a subsidiary, except for indirect investments in investment-grade corporate securities through the Company’s money market accounts.

     10. Miscellaneous.

          10.1. Waivers and Amendments. With the written consent of the record holders of a majority of the outstanding aggregate principal amount of the Notes, the obligations of the Company under the Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), and with the same consent the Company may enter into a supplementary agreement for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement, or of any supplemental agreement or modifying in any manner the rights and obligations created hereunder or thereunder.

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          10.2. Notices. All notices, requests, consents and other communications required hereunder shall be in writing and shall be personally delivered, sent by delivery service or mailed (in either case with 3-day delivery guaranteed), to the addresses listed below, or at such other address as the Company or the Purchasers may specify by written notice:

To the Company:	With copies to:
Restore Medical, Inc.	Dorsey & Whitney LLP
2800 Patton Road	50 South Sixth Street
St. Paul, Minnesota 55113	Minneapolis, Minnesota 55402
Attention: Chief Executive Officer	Attention: Kenneth L. Cutler, Esq.
To the Purchasers:
The addresses listed on Schedule A
attached hereto

Such notices and other communications shall for all purposes of this Agreement be treated as being effective or having been given if delivered personally, or, if sent by mail or delivery service, when received.

          10.4. Survival of Representations and Warranties. All representations and warranties contained herein shall survive the execution and delivery of this Agreement, any investigation at any time made by or on behalf of the Purchasers, and the sale and purchase of the Securities and payment therefor. All statements contained in any certificate, instrument or other writing delivered by or on behalf of the Company pursuant hereto or in connection with or in contemplation of the transactions herein contemplated shall constitute representations and warranties by the Company hereunder.

          10.5. Parties in Interest. All the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto but shall inure to the benefit of and be enforceable by the holder or holders from time to time of any of Securities only to the extent herein specifically provided.

          10.6. Assignability. This Agreement may not be assigned by the Company or the Purchasers without the prior written consent of the other parties, except that, upon notice to the Company, any Purchaser may assign this Agreement to an entity which, directly or indirectly, is controlled by or is under common control with such Purchaser.

          10.7. Amendment. This Agreement may not be amended, changed, modified or discharged, except by a writing signed by the Company and the Purchasers holding a majority of the principal amount of the Notes issued pursuant hereto.

          10.8. Expenses. The Company will pay its own respective fees and expenses and the reasonable expenses incurred by the Purchasers and no more than one counsel acting on behalf of such Purchasers in connection with this Agreement and the sale and purchase of the Securities and the other transactions described in and contemplated by this Agreement.

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          10.9. Severability. If any provision contained herein is held to be invalid or unenforceable by a court of competent jurisdiction, such provision will be severed herefrom and such invalidity or unenforceability will not affect any other provision of this Agreement, the balance of which will remain in and have its intended full force and effect; provided, however, if such invalid or unenforceable provision may be modified so as to be valid and enforceable as a matter of law, such provision will be deemed to have been modified so as to be valid and enforceable to the maximum extent permitted by law.

          10.10. Headings. The headings of the sections of this Agreement have been inserted for convenience of reference only and do not constitute a part of this Agreement.

          10.11. Choice of Law. It is the intention of the parties that the internal laws of the State of Minnesota, without regard to the body of law controlling conflicts of law, shall govern the validity of this Agreement, the construction of its terms and the interpretation of the rights and duties of the parties.

          10.12. Counterparts. This Agreement may be executed concurrently 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.

[The remainder of this page is intentionally left blank; signature page follows]

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     IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered by their proper and duly authorized representatives as of the day and year first above written.

RESTORE MEDICAL, INC.
By	/s/ Susan L. Critzer
	Name:	Susan L. Critzer
	Title:	President and Chief Executive Officer

     IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered by their proper and duly authorized representatives as of the day and year first above written.

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:	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        Special Limited Partner By: MPM Asset Management II, LLC, its General Partner
By:	Luke Evnin
	Name:	Luke Evnin
	Title:	Manager
MPM ASSET MANAGEMENT INVESTORS 2000B LLC
By:	Luke Evnin
	Name:	Luke Evnin
	Title:	Manager

     IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered by their proper and duly authorized representatives as of the day and year first above written.

CHARTER VENTURES II, L.P.
By:	/s/ A. Barr Dolan
	Name:	A. Barr Dolan
	Its:
EVENTYR INVESTMENTS, L.P.
By:	/s/ Roz H. Hatler
	Name:	Roz H. Hatler
	Its:	General Partner
/s/ Mark B. Knudson
Mark B. Knudson, Ph.D.
/s/ Timothy I. Maudlin
Timothy I. Maudlin
/s/ Robert S. Nickoloff
Robert S. Nickoloff

EX-10.20 7 c01111a1exv10w20.htm AMENDMENT NO. 1 TO THE BRIDGE LOAN AGREEMENT

EXHIBIT 10.20

AMENDMENT NO. 1 TO
BRIDGE LOAN AGREEMENT

     This Amendment No. 1 (“Amendment No. 1”) to that certain Bridge Loan Agreement dated June 16, 2003 (the “Agreement”) by and among Restore Medical, Inc., a Minnesota corporation (the “Company”), and the investors listed on Schedule A thereto (the “Purchasers”) is made and entered into this 9^th day of December, 2003 by and among the Company and the Purchasers. Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Agreement.

     WHEREAS, pursuant to Section 10.7 of the Agreement, the parties reserved the right to amend the Agreement.

     WHEREAS, the parties desire to amend the Agreement, and, in accordance with Section 10.7 of the Agreement, this Amendment No. 1 has been authorized and approved by the Company and Purchasers holding at least a majority of the principle amount of the Notes issued pursuant to the Agreement.

     NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the Company and the undersigned Purchasers agree to and hereby amend and modify the following sections, paragraphs, and terms of the Agreement in the following respects:

     1. Section 1 of the Agreement is deleted in its entirety, and the following is substituted in its place:

     “1. Authorization of the Notes and Warrants. The Company has authorized the issuance and sale of subordinated convertible notes up to an aggregate principal amount of $5,374,462.49, bearing interest at a rate of 12% per annum, substantially in the form attached hereto as Exhibit A (collectively, the “Notes”), and warrants to purchase up to an aggregate of 671,914 shares of the Company’s Common Stock, substantially in the form attached hereto as Exhibit B (collectively, the “Warrants”).”

     2. Clause (b) of Section 2 of the Agreement is deleted in its entirety, and the following is substituted in its place:

     “(b) in exchange for the Purchase Price of Warrant, a Warrant to purchase the number of shares of Common Stock set forth opposite the name of each such Purchaser at an exercise price of $0.01 per share.”

     3. The last sentence set forth in Section 7.1 of the Agreement is deleted in its entirety, and the following is substituted in its place:

     “The number of shares of equity securities to which the Purchasers shall be entitled upon such conversion shall equal the principal amount owing under the Notes (together with any interest thereon, if the Purchasers elect to convert such interest), divided by the Sales Price.”

     4. The last sentence set forth in Section 7.3 of the Agreement is deleted in its entirety and the following is substituted in its place:

“If the conversion of the Notes results in any fraction of a share, the Company shall make payment in cash for such fractional interest, calculated on the basis of the Sales Price per full share, or as may be adjusted pursuant to the terms hereof.”

     5. Schedule A to the Agreement is deleted in its entirety and replaced with the amended version of Schedule A attached to this Amendment No. 1.

     6. Entire Agreement. The Agreement, as amended by this Amendment No. 1 (as so amended, the “Amended Agreement”), contains the entire understanding between the parties hereto with respect to the subject matter hereof and shall supersede and terminate any prior understandings, agreements, obligations or representations, written or oral, relating to the subject matter hereof, including, but not limited to the Agreement as originally executed. The parties agree that the Amended Agreement is the result of negotiations between the parties and that the language of the Amended Agreement shall not be construed for or against any particular party.

     7. Counterparts. This Amendment No. 1 may be executed in any number of counterparts, all of which shall constitute a single agreement. Signatures delivered by facsimile transmission shall be deemed original signatures for all purposes.

[The remainder of this page intentionally is left blank; signature page follows]

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          IN WITNESS WHEREOF, the parties have caused this Amendment No. 1 to the Agreement to be duly executed and delivered by their proper and duly authorized representatives as of the day and year first above written.

RESTORE MEDICAL, INC.
By	/s/ Susan L. Critzer
	Name: Susan L. Critzer
	Title: President and Chief Executive Officer

Signature Page to Amendment No. 1 to
Bridge Loan Agreement

     IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered by their proper and duly authorized representatives as of the day and year first above written.

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:	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        Special Limited Partner By: MPM Asset Management II, LLC, its General Partner
By:	Luke Evnin
	Name:	Luke Evnin
	Title:	Manager
MPM ASSET MANAGEMENT INVESTORS 2000B LLC
By:	Luke Evnin
	Name:	Luke Evnin
	Title:	Manager

Signature Page to Amendment No. 1 to
Bridge Loan Agreement

     IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered by their proper and duly authorized representatives as of the day and year first above written.

CHARTER VENTURES II, L.P.
By:	/s/ A. Barr Dolan
	Name:	A. Barr Dolan
	Its:
EVENTYR INVESTMENTS, L.P.
By:	/s/ Roz H. Hatler
	Name:	Roz H. Hatler
	Its:	General Partner
/s/ Mark B. Knudson
Mark B. Knudson, Ph.D.
/s/ Timothy I. Maudlin
Timothy I. Maudlin
/s/ Robert S. Nickoloff
Robert S. Nickoloff

Signature Page to Amendment No. 1 to
Bridge Loan Agreement

EX-10.21 8 c01111a1exv10w21.htm FORM OF AMENDED AND RESTATED PROMISSORY NOTE

EXHIBIT 10.21

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”). IT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR EVIDENCE SATISFACTORY TO THE PAYOR OF AN APPLICABLE EXEMPTION UNDER THE ACT OR COMPLIANCE WITH RULE 144 UNDER SUCH ACT.

PROMISSORY NOTE

$___	Promissory Note No. ___
	June 16, 2003
	as amended December 9, 2003

     FOR VALUE RECEIVED, the undersigned, Restore Medical, Inc. (“Payor”), hereby promises to pay                                                              (“Payee”) the sum of                                           DOLLARS ($                    ) in lawful currency of the United States of America at the demand of the Payee at any time on or after December 31, 2003. This Note shall bear interest at a rate of 12% per annum, commencing as of June 16, 2003, payable together with principal at maturity. Payment shall be credited first to Costs (as defined below), if any, then to accrued interest due and payable, and any remainder shall be applied to principal.

     This Note is issued pursuant to, and is entitled to the benefits of the provisions of that certain Bridge Loan Agreement, dated as of June 16, 2003, as amended as of December 9, 2003 (the “Bridge Loan Agreement”) between the Payor, the Payee and the others parties thereto; but neither this reference to such Bridge Loan Agreement nor any provision thereof shall affect or impair the absolute and unconditional obligation of the maker of this Note to pay the principal hereof and interest hereon as herein provided. Any capitalized term not otherwise defined herein shall have the meaning ascribed to such term in the Bridge Loan Agreement.

     The holder hereof is entitled to all of the benefits and subject to all of the obligations provided for in the Bridge Loan Agreement, including conversion hereof as provided under Section 7.1 thereof, and repayment in the event of (a) any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, (b) any consolidation, merger or sale of all or substantially all of the assets of the Company, or (c) any transfer of more than fifty percent (50%) of the voting power of the Company as provided under Section 7.5 thereof. Reference is made to the Bridge Loan Agreement for a statement of the terms and conditions under which this indebtedness was incurred (including conversion, waiver, etc.) and the Events of Default under which the promissory note may come due. The provisions of the Bridge Loan Agreement are incorporated by reference herein with the same force and effect as if fully set forth herein.

     This Note shall, upon an Event of Default (as defined in the Bridge Loan Agreement), become immediately due and payable without any notice or other action on the part of the holder hereof, as specified in the Bridge Loan Agreement. This Note may not be prepaid in whole or in part without the consent of the Payee.

     This Note is secured under a security agreement (the “Security Agreement”) between the Payor and the Payee dated as of June 16, 2003, attached hereto as Exhibit A. Reference is hereby made to the Security Agreement for a description of the nature and extent of the security for this Note and the rights with respect to such security of the holder of this Note.

     The Company hereby agrees, subject only to any limitation imposed by applicable law, to pay all expenses, including reasonable attorneys’ fees and legal expenses, incurred by the holder of this Note (“Costs”) in endeavoring to collect any amounts payable hereunder which are not paid when due, whether by declaration or otherwise. The Company agrees that any delay on the part of the holder in exercising any rights hereunder will not operate as a waiver of such rights. The holder of this Note shall not by any act, delay, omission or otherwise be deemed to have waived any of its rights or remedies, and no waiver of any kind shall be valid unless in writing and signed by the party or parties waiving such rights or remedies.

     This Note has been acquired for investment and has not been registered under the Act. This Note may not be sold, offered for sale, pledged, hypothecated or otherwise transferred in the absence of such registration or evidence satisfactory to Payor of an applicable exemption therefrom under the Act or compliance with Rule 144 under the Act.

     This Note shall be deemed to have been made under and shall be governed by the laws of the State of Minnesota without giving effect to conflict of laws rules and none of its terms or provisions may be waived, altered, modified or amended except as Payor or Payee may consent thereto in writing.

     The Payor and all endorsers of this Note each hereby waives presentment, demand, notice of nonpayment, protest and all other demands and notices in connection with the delivery, acceptance, performance or enforcement of this Note.

     Amendment. This Note is intended to amend by substitution the Note dated as of June 16, 2003, made by the Company in favor of Payee.

     IN WITNESS WHEREOF, Payor has executed and delivered this Note to Payee as of the date first written above.

RESTORE MEDICAL, INC.
By:
	Name: Susan L. Critzer
	Title: President and Chief Executive Officer

EX-10.22 9 c01111a1exv10w22.htm FORM OF AMENDED AND RESTATED WARRANT TO PURCHASE COMMON STOCK

EXHIBIT 10.22

THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”). THIS WARRANT AND SUCH SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR EVIDENCE SATISFACTORY TO THE COMPANY OF AN APPLICABLE EXEMPTION FROM REGISTRATION UNDER THE ACT OR COMPLIANCE WITH RULE 144 UNDER SUCH ACT. THE TRANSFER OF THIS WARRANT IS FURTHER RESTRICTED AS PROVIDED HEREIN.

AMENDED AND RESTATED
COMMON STOCK WARRANT

Warrant No. ___ December 9, 2003

WARRANT TO PURCHASE

_______ SHARES OF COMMON STOCK

OF

RESTORE MEDICAL, INC.

This certifies that as of the date written above (the “Warrant Issue Date”), for value received,                                          (“Holder”) is entitled, subject to the terms set forth below, to purchase from Restore Medical, Inc., a Minnesota corporation (the “Company”), such number of fully paid and non-assessable shares of Common Stock, par value $0.01, of the Company (“Common Stock”), as set forth in Section 2 hereof, (subject to adjustment as provided in Section 10 hereof) upon surrender hereof, at the principal office of the Company referred to below, with the Notice of Exercise attached hereto duly executed, and simultaneous payment thereof in lawful money of the United States or otherwise as hereinafter provided, at the Exercise Price as set forth in Section 2 below. The number, character and Exercise Price of such shares of Common Stock are subject to adjustment as provided below. The term “Warrant” as used herein, shall include this Warrant and any warrants delivered in substitution or exchange therefor as provided herein.

     This Warrant is being issued in connection with a bridge financing of the Company pursuant to a Bridge Loan Agreement, as amended (the “Bridge Loan Agreement”) and related Promissory Note, as amended (the “Note”), each dated as of the date hereof (the “Bridge Financing”). Capitalized terms used herein but not defined herein shall have the meaning set forth in the Bridge Loan Agreement.

1. Term of Warrant. Subject to the terms and conditions set forth herein, this Warrant shall be exercisable in whole or in part; provided however that notwithstanding anything to the contrary herein, this Warrant shall expire upon the earlier of (a) June 16, 2011 and (b) the closing of (i) any consolidation or merger of the Company with or into another entity (except a consolidation

or merger in which the holders of capital stock of the Company immediately prior to such consolidation or merger continue to hold at least 50% of the voting power of the capital stock of the Company or the surviving or acquiring entity) or (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company (any one of which, a “Corporate Transaction”), and shall be void thereafter. In the event of a Corporate Transaction, the Company shall mail notice of such Corporate Transaction to the Holder at least twenty (20) days prior to the consummation of such Corporate Transaction.

2. Exercise Price and Number of Shares.

(A) The Exercise Price at which this Warrant may be exercised shall be $0.01 per share of Common Stock, as adjusted from time to time pursuant to Section 10 hereof.

(B) The number of shares of Common Stock initially issuable upon exercise of this Warrant shall be 46,412.

3. Exercise of Warrant.

(A) Manner of Exercise. The purchase rights represented by this Warrant are exercisable by the Holder in whole or in part, at any time, or from time to time, during the term hereof as described in Section 1 above, by the surrender of this Warrant and the Notice of Exercise attached hereto duly completed and executed on behalf of the Holder, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Holder at the address of the Holder appearing on the books of the Company), together with payment of an amount equal to the Exercise Price multiplied by the number of shares then being purchased, at Holder’s option in cash, by bank cashier’s check or certified check (or other check acceptable to the Company) or by wire transfer to a bank account designated by the Company for that purpose by written notice to Holder.

Notwithstanding the provisions of Section 1, if the Holder has not exercised this Warrant prior to the closing of a Corporate Transaction, this Warrant shall automatically be deemed to be exercised in full in the manner set forth in Section 3(C), without any further action on behalf of the Holder, immediately prior to such closing.

(B) Effective Time of Exercise. This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the Holder entitled to receive the shares of Common Stock issuable upon such exercise shall be treated for all purposes as the holder of record of such shares as of the close of business on such date. As promptly as practicable on or after such date and in any event within ten (10) days thereafter, the Company at its expense shall issue and deliver to the Holder a certificate or certificates in the name of the Holder or as such Holder may direct (upon payment by such Holder of any applicable transfer taxes) for the number of shares issuable upon such exercise. In the event that this Warrant is exercised in part, the Company at its expense will execute and deliver a new warrant of like tenor exercisable for the number of shares then remaining for which this warrant may then be exercised.

(C) Net Issue Exercise.

          (i) In lieu of exercising this Warrant in the manner provided above in Section 3(A), the Holder may elect to receive shares equal to the value of this Warrant (or portion thereof being exercised) by surrender of this Warrant at the principal office of the Company together with notice of such election on the Notice of Exercise form attached hereto duly executed by such Holder or such Holder’s duly authorized attorney, in which event the Company shall issue to such Holder a number of shares computed using the following formula:

	X=Y(A-B)
		A
Where	X =	The number of shares to be issued to the Holder
	Y =	The number of shares purchasable under this Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being cancelled (at the date of such calculation)
	A =	The fair market value of one share of Warrant stock (at the date of such calculation)
	B =	The Exercise Price (as adjusted to the date of such calculation)

          (ii) For purposes of this Section 3(C), the fair market value of one share of Common Stock on the date of calculation shall mean:

               (A) if the exercise is in connection with an initial public offering of the Company’s Common Stock, and if the Company’s Registration Statement relating to such public offering has been declared effective by the Securities and Exchange Commission, then the fair market value of Common Stock shall be the initial “Price to Public” per share specified in the final prospectus with respect to the offering;

               (B) if this Warrant is exercised after, and not in connection with, the Company’s initial public offering, and if the Company’s Common Stock is traded on a securities exchange or The Nasdaq Stock Market or actively traded over-the-counter:

                    (1) if the Company’s Common Stock is traded on a securities exchange or The Nasdaq Stock Market, the fair market value shall be deemed to be the average of the closing prices over a thirty (30) day period ending three days before date of calculation; or

                    (2) if the Company’s Common Stock is actively traded over-the-counter, the fair market value shall be deemed to be the average of the closing

bid or sales price (whichever is applicable) over the thirty (30) day period ending three days before the date of calculation; or

          (C) if neither (A) nor (B) is applicable, the fair market value shall be at the highest price per share which the Company could obtain on the date of calculation from a willing buyer (not a current employee or director) for shares of Common Stock sold by the Company, from authorized but unissued shares, as determined in good faith by the Board of Directors and agreed to by the Holder.

4. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. In lieu of any fractional share to which the Holder would otherwise be entitled, the Company shall make a cash payment equal to the Exercise Price multiplied by such fraction.

5. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity bond or other security in an amount reasonably satisfactory as sufficient security, or in the case of mutilation, on surrender and cancellation of this Warrant, the Company at its expense shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor and amount.

6. Rights of Stockholders.

(A) Limitations on Rights of Warrant. Subject to Section 10 below, the Holder shall not be entitled to vote or receive dividends or be deemed the holder of Common Stock or any other securities of the Company that may at any time be issuable on the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon the Holder, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance of stock, reclassification of stock, change of par value, or change of stock to no par value, consolidation, merger, conveyance or otherwise) or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until the Warrant shall have been exercised as provided herein.

(B) Notices of Certain Transactions. In case:

(a) the Company shall take a record of the holders of its Common Stock and/or preferred stock (or other stock or securities at the time deliverable upon the exercise of this Warrant) for the purpose of entitling or enabling them to receive any dividend or other distribution, or to receive any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right, to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right, or

(b) of any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation or merger of the Company, any consolidation or merger of the Company with or into another corporation

(other than a consolidation or merger in which the Company is the surviving entity), or any transfer of all or substantially all of the assets of the Company, or

(c) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company, or

(d) of the initial public offering of the Company,

then, and in each such case, the Company will mail or cause to be mailed to the Holder a notice specifying, as the case may be, (i) the date on which a record is to be taken for the purpose of such dividend, distribution, or right, and stating the amount and character of such dividend, distribution or right, or (ii) the effective date on which such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation, winding-up, redemption or conversion is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or other stock or securities at the time deliverable upon such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation, winding-up, redemption or conversion) are to be determined. Such notice shall be mailed at least twenty (20) days prior to the record date or effective date for the event specified in such notice.

7. Transfer of Warrant.

(A) Non-transferability of Warrant. This Warrant may be transferred, in whole or part, without consent of the Company, only to an Affiliate of the Holder and to and from the beneficial owner hereof and any nominee from time to time acting as custodian for the beneficial owner hereof, in each case upon receipt of a representation reasonably satisfactory to the Company from the proposed transferee that it is an “accredited investor” as such term is defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933 and is taking this Warrant for his, her or its own account, for investment and not with a view towards distribution or resale. This Warrant may also be transferred, in whole or part, to a non-Affiliate of the Holder with the prior written consent of the Company. For purposes hereof, the term “Affiliate” shall mean any parent, subsidiary, stockholder, partner, retired partner or member of the Holder, and if the beneficial owner of this Warrant is an individual, any spouse, child, heir, legatee, executor or other personal representative of such individual. Any such transfer shall be made only in compliance with all applicable federal and state securities laws.

(B) Exchange of Warrant Upon Transfer. On the surrender of this Warrant in connection with a transfer pursuant to the terms of Section 7(A), the Company, at its expense, shall issue to the successor a new warrant or warrants of like tenor, in the name of the assignees, successors or heirs, who shall thereupon become the Holder(s) thereof, and shall be subject to all of the terms and conditions thereof.

(C) Compliance With Securities Laws.

(1) The Holder of this Warrant, or if the Holder is a custodian, the beneficial owner of this Warrant, by acceptance hereof, acknowledges that this Warrant and the shares of Common Stock to be issued upon exercise hereof are being acquired

solely for the Holder’s (or beneficial owner’s) own account and not as a nominee for any other party, and for investment, and that the Holder will not offer, sell or otherwise dispose of this Warrant or any shares of Common Stock to be issued upon exercise hereof except under circumstances that will not result in a violation of any federal or state securities laws. Upon exercise of the Warrant (other than pursuant to the net exercise provision of Section 3(C)), the Holder shall as a condition to such exercise, if reasonably requested by the Company, confirm in writing, in a form reasonably satisfactory to the Company that the shares of Common Stock so purchased are being acquired solely for the Holder’s own account and not as a nominee for any other party, for investment, and not with a view toward distribution or resale.

(2) All shares of Common Stock issued upon exercise hereof may be stamped or imprinted with a legend in substantially the following form (in addition to any legend required by state securities laws), so long as such legend is required by applicable law:

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”). THESE SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR EVIDENCE SATISFACTORY TO THE COMPANY OF AN APPLICABLE EXEMPTION FROM REGISTRATION UNDER THE ACT OR COMPLIANCE WITH RULE 144 UNDER SUCH ACT.

If the legend is no longer required (as evidenced by a legal opinion for the Holder or the Company or by evidence otherwise reasonably satisfactory to the Company), the Company will promptly remove such legend.

8. Reservation of Stock. During the term of this Warrant, the Company will at all times have authorized and reserved for the purpose of issuance upon exercise of this Warrant, a sufficient number of shares of the Company’s Common Stock to provide for the exercise of this Warrant. If at any time during the term of this Warrant the number of authorized but unissued shares of Common Stock shall not be sufficient to permit exercise of this Warrant, the Company 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. All shares that may be issued upon the exercise of rights represented by this Warrant upon issuance, will be fully paid and non-assessable, free from all taxes, liens and charges in respect of the issuance thereof.

9. Amendments. This Warrant and any term hereof may be changed, waived, discharged or terminated only in accordance with the terms of the Bridge Loan Agreement.

10. Special Provision.

(A) Reclassification. If the Company at any time while this Warrant, or any portion thereof, remains outstanding and unexpired, by reclassification of securities or otherwise,

shall change any of the securities as to which purchase rights under this Warrant exist into the same or a different number of securities of any other class or classes, this Warrant shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as a result of such change with respect to the securities that were subject to the purchase rights under this Warrant immediately prior to such reclassification or other change and the Exercise Price therefore shall be appropriately adjusted, all subject to further adjustment as provided in this Section 10.

(B) Split, Subdivision, Reverse Split or Combination or Shares. If the Company at any time while this Warrant, or any portion thereof, remains outstanding and unexpired shall issue additional shares of its Common Stock as a dividend with respect to any shares of its Common Stock, or split, subdivide, reverse split or combine the securities as to which purchase rights under the Warrant exist, into a different number of securities of the same class, the Exercise Price per share for such securities shall be proportionately decreased in the case of a stock dividend, split or subdivision or proportionately increased in the case of a combination or reverse split and the number of shares which the Holder hereof shall be entitled to receive upon exercise shall be correspondingly appropriately adjusted.

(C) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment pursuant to this Section 10, the Company at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and promptly mail to each Holder of this Warrant a certification of the Company’s Chief Financial Officer setting forth in detail (i) the facts requiring such adjustment, (ii) the Exercise Price after such adjustment and (iii) the kind and amount of stock or other securities or property into which this Warrant shall be exercisable after such adjustment.

11. No Impairment. The Company will not avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith use its best efforts to carry out all of the provisions of this Warrant, including without limitation, the provisions of Section 10, and to take all such action as may be necessary or appropriate in order to protect the exercise rights of the Holder against impairment.

12. Miscellaneous.

(A) Notices. Any notice required or permitted under this Warrant shall be in writing sent by hand or certified or registered, first class mail, return receipt requested, to:

Holder:	At the address set forth for the original Holder hereof in Schedule A to the Bridge Loan Agreement.
Company:	Restore Medical, Inc.
	2800 Patton Drive
	St. Paul, MN 55113
	Attention: President and Chief Executive Officer

or to such other address of which either party shall notify the other by similar notice.

(B) Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the State of Minnesota, without regard to its conflicts of law provisions.

(C) Successors. This Warrant shall be binding upon any successor(s) or assign(s) of the Company.

(D) Headings. The headings used in this Warrant are used for convenience only and are not to be considered in construing or interpreting this Warrant.

     (E) Saturdays, Sundays, and Holidays. If the expiration date of this Warrant falls on a Saturday, Sunday or a Holiday, the term of this Warrant shall be extended to the next business day. “Holiday” as used herein means any day on which the principal office of the Company is officially closed or which is a bank closing day for banks in New York or in the Federal Reserve System. “Close of business” as used herein means close of business in the State of New York.

13. Amendment. This warrant is intended to amend by substitution the Common Stock Warrant dated as of June 16, 2003, made by the Company in favor of Holder.

IN WITNESS WHEREOF, Restore Medical, Inc. has caused this Warrant to be executed by its officer thereunto duly authorized.

Dated: December 9, 2003

RESTORE MEDICAL, INC.
By
	Name: Susan L. Critzer
	Title: President and Chief Executive
	Officer

NOTICE OF EXERCISE

To Restore Medical, Inc.:

1. The undersigned hereby elects to purchase                      shares of Common Stock of Restore Medical, Inc., par value $0.01, pursuant to the terms of the attached Warrant:

[Check Appropriate Box]

o	a.	Tenders herewith payment of the exercise price for such shares in full.
o	b.	Elects to exercise this Warrant for                      shares purchasable pursuant to the Warrant pursuant to the net exercise provisions of Section 3(C).

2. If the undersigned is exercising this Warrant pursuant to 1 (a) above, the undersigned hereby confirms and acknowledges that the shares of the Common Stock to be issued upon exercise thereof are being acquired solely for the account of the undersigned and not as a nominee for any other party, and for investment and not with a view towards distribution, and that the undersigned will not offer, sell or otherwise dispose of any such shares of Common Stock except under circumstances that will not result in a violation of the Securities Act of 1933, as amended, or any state securities laws.

3. Please issue a certificate or certificates representing said shares of the Common Stock in the name of the undersigned or in such other name as is specified below.

4. Please issue a new Warrant for the unexercised portion (if any) of the attached Warrant.

Signature	Date
Name                                                             [PLEASE PRINT]

EX-23.1 10 c01111a1exv23w1.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

April 14, 2006

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

EX-99.1 11 c01111a1exv99w1.htm CONSENT OF DIRECTOR NOMINEE

EXHIBIT 99.1

CONSENT OF DIRECTOR-NOMINEE

     This Consent of Director-Nominee is delivered in connection with the registration statement on Form S-1 (Registration No. 333-132368) (as it may be amended from time to time, the “Registration Statement”) of Restore Medical, Inc. for the registration under the Securities Act of 1933, as amended, of up to $50,000,000 of common stock of Restore Medical, Inc.

     The undersigned consents to (a) the references made to him in the Registration Statement and related prospectus as having consented to serve as a director of Restore Medical, Inc. effective immediately after the completion of the offering contemplated by the Registration Statement and such prospectus and (b) the inclusion of certain biographical information regarding him in the Registration Statement and related prospectus.

April 11, 2006	/s/ Richard J. Nigon
	Richard J. Nigon

EX-99.2 12 c01111a1exv99w2.htm CONSENT OF DIRECTOR NOMINEE

EXHIBIT 99.2

CONSENT OF DIRECTOR-NOMINEE

     This Consent of Director-Nominee is delivered in connection with the registration statement on Form S-1 (Registration No. 333-132368) (as it may be amended from time to time, the “Registration Statement”) of Restore Medical, Inc. for the registration under the Securities Act of 1933, as amended, of up to $50,000,000 of common stock of Restore Medical, Inc.

     The undersigned consents to (a) the references made to him in the Registration Statement and related prospectus as having consented to serve as a director of Restore Medical, Inc. effective immediately after the completion of the offering contemplated by the Registration Statement and such prospectus and (b) the inclusion of certain biographical information regarding him in the Registration Statement and related prospectus.

April 11, 2006	/s/ Howard P. Liszt
	Howard P. Liszt

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[Dorsey & Whitney LLP ]

April 14, 2006

Securities and Exchange Commission
Division of Corporation Finance
100 F Street N.E.
Washington, DC 20549

Attn: Mr. Timothy Buchmiller
Mailstop 6010

VIA FACSIMILE AND EDGAR

     Re.      Restore Medical, Inc.
     Registration Statement on Form S-1
     Filed March 13, 2006
     Registration No. 333-132368

Dear Mr. Buchmiller:

     On behalf of Restore Medical, Inc. (“Restore”), we are responding to the letter dated April 7, 2006 (the “Comment Letter”) from Peggy A. Fisher, Assistant Director of the Securities and Exchange Commission (the “Commission”). Concurrently herewith we transmit for filing under the Securities Act of 1933, as amended, Amendment No. 1 to Restore’s Registration Statement on Form S-1 (the “Form S-1”).

     Set forth below are the responses to the Comment Letter provided to us by Restore. For ease of reference, each comment contained in the Comment Letter appears directly above Restore’s corresponding response.

General

1. Please confirm that any preliminary prospectus you circulate will include all non-Rule 430A information. This includes a bona fide estimate of the range of the maximum offering price and the maximum number of securities offered.

     Response: We hereby confirm that any preliminary prospectus that Restore circulates will include all non-Rule 430A information, including a bona fide estimate of the range of the maximum offering price and the maximum number of securities offered.

2. Please provide us with copies of the industry reports you cite throughout your prospectus. Clearly mark the relevant sections that support the data you have included in your prospectus and the page number of your prospectus where such data has been used. Also tell us whether the sources of the cited data have consented to your use of their names and data and whether any of the reports were commissioned by you or prepared specifically for your use.

     Response: Copies of the requested industry reports with the relevant sections marked that support the data included in the prospectus and the page number of the prospectus will be delivered supplementally via Federal Express to the Staff’s attention.

Securities and Exchange Commission
April 14, 2006
Page 2

3. Please provide us with copies of any graphics you intend to use in your prospectus or confirm that you do not intend to use any graphics.

     Response: Copies of the graphics we intend to use in the prospectus will be delivered supplementally via Federal Express to the Staff’s attention.

4. We note that you have created a number of acronyms that you use in various locations throughout the prospectus. If retained, please ensure that their meanings are clear when they are used in sections other than where they are defined or explained.

     Response: We note the Staff’s comment and have reviewed and revised the prospectus where we deemed appropriate to further ensure that the meanings of the acronyms are clear when used.

Prospectus Summary, page 1

5. Please expand your summary section to indicate some of the more significant challenges you face and the amount of your historical net losses.

     Response: We have revised the summary section of the prospectus to include the requested disclosure. Please see page 1 and page 3 of the Form S-1.

Risk Factors, page 6

6. We note from your disclosure in the first paragraph on page 34 that generally your average selling price for international sales averaged approximately 50% of your United States average selling price. Please enhance your risk factor disclosure to indicate, if true, that your gross margins may decline due to increased international sales.

     Response: We have revised the risk factor disclosure as requested to indicate that our gross margins, or total gross profit as a percentage of total net sales, may decline as a result of the difference in average selling price if revenue from international sales of Pillar Systems, as a percentage of total net sales, increases relative to US sales of Pillar Systems. Please see page 7 of the Form S-1.

We depend on a few international third-party distributors..., page 11

7. Please identify the distributor that accounted for 11% of your total sales.

     Response: We have identified the distributor as requested. Please see page 11 of the Form S-1.

Dilution, page 22

8. Expand the last paragraph to quantify the increase in dilution and the change in the preceding table if you assume all outstanding options and warrants are exercised.

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Securities and Exchange Commission
April 14, 2006
Page 3

     Response: We have expanded the last paragraph as requested to quantify the increase in dilution and the change in the preceding table if we assume all outstanding options and warrants are exercised. Please see page 23 of the Form S-1.

Selected Financial Data, page 23

9. Please revise the introductory paragraph to indicate the source of the statements of operations data for the years ended December 31, 2001 and 2002 and the balance sheet data as of December 31, 2001, 2002 and 2003.

     Response: We have revised the introductory paragraph as requested to indicate the source of the statements of operations data for the years ended December 31, 2001 and 2002 and the balance sheet data as of December 31, 2001, 2002 and 2003. Please see page 24 of the Form S-1.

Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 26

10. Please revise the last italicized sentences of your introduction to your “Management’s Discussion and Analysis” section to eliminate the implication that you have not described all material risks in your “Risk Factors” section, and revise your risk factors as necessary to include a discussion of all material risks.

     Response: We have revised the introduction to the “Management’s Discussion and Analysis” section of the prospectus as requested to eliminate the implication that we have not described all material risks in the “Risk Factors” section. Please see page 27 of the Form S-1.

Application of Critical Accounting Policies and Use of Estimates, page 28

— Stock-Based Compensation, page 30

11. You state that in the preparation of your consolidated financial statements you engaged an independent valuation firm to assist in determining the fair value of your common stock. As such, disclose the name of the expert and include the consent of the expert. You must provide a written consent under Securities Act Rule 436 as an exhibit to the filing.

     Response: We note the Staff’s comment and have revised the prospectus to clarify that Restore estimated the fair market value of its common stock based upon several factors, which included input from external appraisers. We respectfully believe that Restore did not rely on such external appraisers as experts from whom written consents would be required to be filed under Securities Act Rule 436. Please see page 31 of the Form S-1.

Series C-1 Financing, page 31

12. Please briefly indicate why you are adjusting the conversion price of your Series C and Series C-1 preferred stock.

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Securities and Exchange Commission
April 14, 2006
Page 4

     Response: The stockholders approved an amendment to Restore’s certificate of incorporation to adjust the conversion price of the Series C and Series C-1 preferred stock in consideration for a modification of the definition of a “qualified” initial public offering such that this initial public offering triggers the mandatory conversion of our preferred stock into common stock. We have revised page 32 of the prospectus to describe the reason for the adjustment to the conversion price.

Results of Operations, page 33

13. We note throughout your MD&A discussion that you state that a change is primarily attributable to more than one cause. In those instances, discuss and quantify the impact of all causes on your results of operations. Avoid just listing causes for an increase/decrease in a particular line item on your income statement. For example, for general administrative expenses in 2005, you refer to increased expenses for the hiring of your new CEO, expenses associated with the resignation of your former CEO, recruiting costs, consulting costs and an increase in bad debt expense in describing the change from 2004 to 2005. Similarly, in your discussion of cost of sales and gross margin for 2004, you refer to higher inventory reserves, higher product insurance costs and reduced costs from volume-related production savings. Please revise your MD&A to provide a meaningful discussion of each increase/decrease in your income statement line items along with the related dollar impact for those periods being compared.

     Response: We note the Staff’s comment and have carefully reviewed the MD&A discussion and revised the disclosure where we deemed practicable to quantify the impact of all causes to provide a meaningful discussion of each increase/decrease in our income statement line items. Please see pages 35 through 37 of the Form S-1.

Comparison of Years Ended December 31, 2004 and 2005, page 33

14. Please indicate why you experience the variance indicated between the average selling prices for products sold in the United States versus your international sales.

     Response: The variance between US and international average selling prices is due to the market development investment and distribution costs incurred by the international third-party distributors that Restore would otherwise incur for domestic sales. Additional disclosure has been provided in response to the Staff’s comment. Please see page 35 of the Form S-1.

Research and development expenses, page 35

15. Please briefly indicate why you suspended research and development work on future products in 2004.

     Response: We have revised the description of our research and development expenses to disclose that we suspended research and development work on future products in 2004 to focus on the development, redesign and commercialization of the Pillar delivery system for commercial introduction in 2005.

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Securities and Exchange Commission
April 14, 2006
Page 5

The Pillar Procedure..., page 47

16. In the table, add a footnote to explain the entry “In process” in the Pillar column on the “Reimbursement (OSA)” line.

     Response: We note the Staff’s comment and have added a footnote in the table as requested. Restore is actively working with the Center for Medicare and Medicaid Services and private insurance carriers to obtain coverage and coding for the Pillar Procedure to treat mild to moderate OSA. Please see page 48 of the Form S-1.

Government Regulations, page 57

17. Please disclose with greater specificity the international countries in which your products are approved for sale. We note, for example, that you have indicated market potential in China and India but it is not clear whether your products are cleared for sale in those countries. We also note that you have sales into “Asia Pacific” and the “Middle East.” Please tell us which countries you include in these categories.

     Response: We have described with greater specificity the international countries in which our products are approved for sale, as requested. Please see page 60 of the Form S-1.

Management, page 61

18. We note from your disclosure on page 15 that you recently hired a chief financial officer. Please tell us why you have not identified your CFO in your management section.

     Response: Restore’s new Chief Financial Officer has been identified in the management section of the prospectus. Mr. Geyen was hired by Restore in March, but had not begun his full time employment with Restore prior to the initial filing of the Form S-1. Please see page 62 of the Form S-1.

19. Please describe Mr. Foster’s business experience from 2003 until he joined your company in June 2004.

     Response: We have revised the description of Mr. Foster’s business experience to indicate that he was executive director at Hill-Rom, Inc. from 2001 through June 2004, not through 2003 as previously indicated. Please see page 63 of the Form S-1.

20. We note that Messrs. Liszt and Nigon will become directors upon the completion of your offering. Please file the written consents of such persons as required by Rule 438 of the Securities Act.

     Response: We have filed the written consents of Messrs. Liszt and Nigon as required by Rule 438 of the Securities Act. Please see Exhibits 99.1 and 99.2 to the Form S-1.

Principal Stockholders, page 72

21. Please identify the natural persons with voting or investment control over the shares held by Bessemer Venture Partners, State Street Bank & Trust, TH Lee Putnam Investment Trust and General Electric Pension Trust.

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Securities and Exchange Commission
April 14, 2006
Page 6

     Response: Bessemer Venture Partners, State Street Bank & Trust, TH Lee Putnam Investment Trust and General Electric Pension Trust are institutional investors, including private investment funds and limited partnerships, with numerous limited partners and/or shareholders. We expect all investment decisions with respect to the registered shares will be made by committees or more than one natural persons who may change from time to time. We respectfully believe identifying natural persons with voting or investment control for these entities would be impractical given the structure of those entities.

Related-Party Transactions, page 75

22. As required by Item 404 of Regulation S-K, please include the monthly service fees paid to Venturi for the use and maintenance of certain equipment referred to in footnote 13 to your financial statements.

     Response: We have included the additional disclosure as requested. Please see page 80 of the Form S-1.

Common Stock, page 79

23. We note the disclosure in your second paragraph that all outstanding shares of your common stock are validly issued, fully paid and nonassessable and that the shares to be issued by you in your offering will be, when issued and paid for, validly issued, fully paid and nonassessable. This disclosure appears to be the opinion of legal counsel. If so, please revise your disclosure to indicate on whose opinion you have relied in making this disclosure and file all required consents.

     Response: We note the Staff’s comment and have revised the prospectus to remove the statement regarding previously issued shares since it was not included based upon the opinion of legal counsel. The validity of the shares of common stock to be issued in this offering will be passed upon by Dorsey & Whitney LLP, and such firm’s consent will be filed with their opinion. Please see page 94 of the Form S-1.

Financial Statements

General

24. As appropriate, please revise to provide updated financial information as required by Rule 3-12 of Regulation S-X.

     Response: We note the Staff’s comment and will revise the Form S-1 as necessary to include updated financial information as required by Rule 3-12 of Regulation S-X.

Report of Independent Registered Accounting Firm, page F-3 and consent

25. Upon consummation of the transaction and prior to the planned effectiveness of the Company’s public offering, please revise your report to remove the explanatory paragraph at the top of the page and to reflect the appropriate report date; ensure the final version is compliant with Article 2 of Regulation S-X. Also, please file a consent with the pre-effective amendment.

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Securities and Exchange Commission
April 14, 2006
Page 7

     Response: We note the Staff’s comment and upon consummation of the transaction and prior to the planned effectiveness of Restore’s public offering, the report will be revised to remove the explanatory paragraph at the top of the page and to reflect the appropriate report date. Furthermore, we will ensure the final version is compliant with Article 2 of Regulation S-X.

Balance Sheets, page F-3

26. Revise to include a pro forma balance sheet (excluding effect of offering proceeds) along the side of the historical balance sheet to give effect to the conversion of your preferred stock that will occur in conjunction with the offering. Also, include a footnote to describe the basis of presentation of the pro forma balance sheet.

     Response: We have revised the prospectus as requested to include a pro forma balance sheet (excluding effect of offering proceeds) along the side of the historical balance sheet to give effect to the conversion of our preferred stock that will occur in conjunction with the offering. Please see page F-3 of the Form S-1. We have also included a footnote to describe the basis of presentation of the pro forma balance sheet. Please see page F-7 of the Form S-1.

Note 1 — Summary of Significant Accounting Policies, page F-7

— (v) Recently Issued Accounting Statements, page F-14

27. Based on your current disclosures here and MD&A, we note that you are adopting SFAS 123(R) on January 1, 2006 using the modified prospective method. As stated in paragraph 72 and 83 of SFAS 123(R), nonpublic entities that used the minimum value method in Statement 123 for either recognition or pro forma disclosures are required to apply the prospective transition method. Please revise or advise us.

     Response: We have revised the prospectus to clarify that Restore is applying the prospective transition method. Please see pages 40 and
F-15 of the Form S-1.

Note 2 — Restatement of Financial Instruments, page F-15

Restated Statement of Cash Flows for the Year Ended December 31, 2003, page F-22

28. We note that you present a total adjustment to ‘non-cash interest expense’ of $2,103,266 and reference this adjustment to items (a) and (b). It appears that the adjustments you reference does not entirely account for the total amount of the adjustment. Please revise and tell us about the adjustments that were made by you other than those currently referenced.

     Response: The disclosure regarding the adjustments to “non-cash interest expense” has been revised to account for the total amount of the adjustment. Please see pages F-18 and F-22 of the Form S-1.

Note 7 — Income Taxes, page F-26

29. Please confirm to us that the detail of the deferred tax assets shown on page F-27 for 2003 and 2004 are restated. If so, please revise to clearly label such information as restated. If not, please tell us how you considered the impact of the restatement adjustments disclosed in Note 2 on your deferred tax assets.

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Securities and Exchange Commission
April 14, 2006
Page 8

     Response: We hereby confirm that the detail of the deferred tax assets shown on page F-27 for 2003 and 2004 are restated, and we have revised the prospectus to clearly label such information as restated. Please see page F-27 of the Form S-1.

Note 10 — Stock Options, page F-33

30. Provide the estimated IPO price or range when available- If the difference between the IPO price and the fair value used to value stock, options or warrants granted during the 12 months prior to the date of the most recent balance sheet is significant please provide us with details of the significant factors contributing to the difference. Please note that we will defer our final evaluation of stock compensation and other costs recognized until you provide the offering price. We may have further comments in this regard when the amendment containing that information is filed.

     Response: We note the Staff’s comment and will provide the requested disclosure when the IPO price or range becomes available.

Note 11 — Debt Financing Arrangement and Warrant Issuances, page F-34

— 2003 Bridge Notes, page F-35

31. We note in June 2003 you issued convertible notes that were convertible into the next defined round of equity financing at a 25% discount from the fair market price. In regards to your accounting for these convertible notes please tell us and revise to clarify the following:

• In connection with the original terms of the financing, the notes provided for conversion into equity. At the time of the issuance of the notes and based on its original terms, tell us how you considered the guidance in SFAS 133 Implementation Issue B16 and paragraphs 12 and 13 of SFAS 133 in accounting for the conversion terms. It appears that the debt instrument contained an embedded put option and the value of the equity financing due to the holders of these notes provided for a higher rate of return on the debt.

• Clarify to us what you mean by “the contingent beneficial conversion feature was eliminated.”

• We note your disclosure that 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. Please tell us why you believed it was appropriate to record a gain on the conversion as oppose to reflecting the value of the bifurcated embedded feature (fair value of the pat option liability) on conversion as part of the basis of the preferred stock.

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Securities and Exchange Commission
April 14, 2006
Page 9

• We note that the features of your 2002 Bridge Notes were similar to the 2003 Bridge Notes. In this regard, please apply this comment to the accounting for the 2002 Bridge Notes.

     Response: In connection with the 2003 Notes conversion feature, Restore reviewed the applicability of paragraphs 12 (a) to 12 (c) and 6 to 11 of SFAS No 133 to determine whether the conversion option is required to be bifurcated from the debt host. In accordance with paragraph 12 (c), we analyzed paragraph 6 of SFAS 133 to evaluate whether or not a separate instrument with the same terms of the conversion option would be a derivative instrument. We concluded that the conversion option does not meet the definition of a derivative (and therefore does not require bifurcation under paragraph 12 of SFAS 133) as it does not have the characteristics described in paragraph 6a and 6c of SFAS 133. The equity into which the debt is convertible is not defined and does not yet exist, and therefore, we believe that an underlying does not exist. Further, the conversion option does not meet the net settlement characteristics since the equity into which the debt is convertible is not yet defined and Restore’s equity securities are not publicly traded, and therefore the criteria in paragraph 9 of SFAS would not be met. As such, the conversion feature does not meet the definition of a derivative per paragraphs 6(a) and 7 of SFAS No. 133. As there is not an embedded put associated with the conversion feature, DIG Issue B16 and paragraph 13 is not applicable.

     The disclosure in Note 11 has been revised to clarify that the December 9, 2003 modification to the 2003 Notes resulted in the removal of the 25% discount to the conversion price to the next round of financing.

     The disclosure in Note 11 has been revised to clarify that during 2004 the embedded put was marked to estimated fair value prior to the conversion of the 2003 Notes to Series C-1 preferred stock. The embedded put had no remaining fair value prior to the conversion of the 2003 Notes to Series C-1 preferred stock.

     The terms of the 2003 Notes were similar to the 2002 Bridge Note. We have addressed the applicable Staff comments related to the 2002 Bridge Notes as follows:

• In connection with the 2002 Note conversion feature, Restore reviewed the applicability of paragraphs 12 (a) to 12 (c) and 6 to 11 of SFAS No 133. The 2002 Note did not contain a net settlement feature for any underlying other than the principal and interest on the note. The amount of this settlement is the notional amount. The equity underlying is not defined and is contingent upon future financing, therefore, until the financing occurs, which results in an automatic conversion to equity, there cannot be a net settlement feature for any equity underlying. As such, the conversion feature does not meet the definition of a derivative per paragraphs 6(a) and 7 of SFAS No. 133. As there is not an embedded put associated with the conversion feature, DIG Issue B16 is not applicable.

• The disclosure in Note 11 has been revised to clarify the December 9, 2003 modification to the 2002 Note resulted in the removal of the 25% discount to the conversion price to the next round of financing.

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Securities and Exchange Commission
April 14, 2006
Page 10

Note 17 — Subsequent Events, page F-39

32. Please confirm our understanding that the 1-for-2 reverse stock split of all of your issued and outstanding common stock will occur before the effectiveness of your registration statement.

     Response: We hereby confirm your understanding that the 1-for-2 reverse stock split of Restore’s issued and outstanding common stock will occur before the effectiveness of the registration statement.

Part II

Item 13. Other Expenses of Issuance and Distribution, page II-1

33. Please include as a separate item any premium paid on any policy obtained in connection with your offering which insures or indemnifies directors or officers against any liabilities they may incur in connection with the registration, offering or sale of your securities. Refer to Instruction to Item 511 of Regulation S-K.

     Response: Additional insurance premiums have not been paid with respect to Restore’s existing director and officer liability insurance in connection with the offering. If a new insurance policy is obtained by Restore in connection with the offering which insures or indemnifies directors or officers against any liabilities they may incur in connection with the registration, offering or sale of Restore’s securities, the premium paid will be disclosed as a separate item as requested.

Item 16. Exhibits, page II-4

34. Please file the 2002 and 2003 bridge loan agreements and notes as exhibits to your registration statement.

     Response: We have filed the 2002 bridge note, the 2003 bridge loan agreement and the forms of the promissory notes and warrants issued pursuant to the 2003 bridge loan agreement as exhibits to the Form S-1 as requested. Please see Exhibits 10.19-10.22 to the Form S-1.

Item 17. Undertakings, page II-5

35. Please include the undertakings in Item 512(a)(5)(ii) and 512(a)(6) of Regulation S-K.

     Response: We have revised the Form S-1 to include the undertakings. Please see page II-6 of the Form S-1.

* * * * *

     As always, should you have further comments or require further information, or if any questions should arise in connection with this submission, please call me at (612) 340-2946 if we can expedite your review in any way, or fax me at (612) 340-8738.

Very Truly Yours,

/s/ Robert A. Kuhns

cc: J. Robert Paulson, Jr.
Kenneth L. Cutler
Mark C. Smith
Andrew D. LaFrence

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-----END PRIVACY-ENHANCED MESSAGE-----

EX-10.16

EXHIBIT 10.16

EMPLOYMENT AND CHANGE IN CONTROL AGREEMENT

     This Employment and Change in Control Agreement (“Agreement”) is made effective as of March 13, 2006, by and between Restore Medical Inc., a Minnesota corporation (the “Company”), and Christopher Geyen, an individual resident of Minnesota (the “Employee”).

     WHEREAS, the Company desires to employ Employee as its Chief Financial Officer (“CFO”), 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 March 13, 2006, 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 CFO, subject and reporting to the President and Chief Executive Officer (“CEO”). 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 President and CEO 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. However, in the event Employee needs to complete certain open projects for Employee’s former employer, the Company will accommodate reasonable requests to complete these open projects as an employee of the Company, and during the Company’s normal business hours, through March 31, 2006 (“Transition Period”). Notwithstanding the foregoing, the Company

time that Employee uses to complete these projects shall not exceed fifteen (15) hours per week (without prior approval) during the Transition Period. 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 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 $15,416.67 monthly, which equates to an annualized Base Salary of $185,000.00, 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 will be reviewed by the Company in January 2007 and may be reviewed annually thereafter for potential increases on the basis of the Employee’s performance and the financial standing of the Company.

     (b) Signing Bonus. The Employee will be entitled to receive a signing bonus of $5,000, less all applicable withholdings, within five (5) business days of the date the Employee completes the Transition Period.

     (c) Additional Performance Incentive. In addition to Base Salary, the Employee will be eligible to receive an additional performance incentive pursuant to the Company’s Management Incentive Plan, 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 target equal to 22% of Base Salary, based on the level of attainment of corporate and individual performance goals as determined in the discretion of the Board of Directors. If paid, the value of the additional performance incentive may be paid to Employee in some combination of cash and stock option grants, as established by the Board of Directors, with any such amounts received by the Employee subject to all required withholdings, deductions, and tax reporting requirements.

     (d) Equity Participation.

     (i) The Board of Directors will approve a stock option grant to Employee to purchase up to 200,000 shares of the Company’s common stock in accordance with the Company’s 1999 Omnibus Stock Plan, as amended (the “Plan”) at an exercise price reflecting the fair market value of the Company’s common stock on the date of the grant as determined by the Board of Directors. Employee’s stock option grant will vest 25% at the end of his first year of employment, and 1/36^th of the remaining balance will vest each month thereafter for 36 months.

     (ii) In the event of an IPO, Employee will be eligible to receive an additional stock option grant of the Company’s common stock under the Plan as of the effective date of the IPO. The number of shares to be included in this

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second grant will be an amount, when added to the initial 200,000 shares grant (as adjusted for any stock split) defined above, which represents 0.9% of the fully diluted issued and outstanding capital stock of the Company (including all outstanding warrants to purchase common or preferred stock, and all issued stock options) following the IPO. The option price of this grant will reflect the fair market value of the Company’s common stock on the date of grant, as determined by the Board of Directors. In the event the IPO does not occur, the Employee will not be eligible to receive a second stock option grant in the amount described in this paragraph.

     (iii) In the event of a “Change in Control” (as defined in Section 6(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 6(c) below) or as the result of a “Constructive Termination” (as defined in Section 6(c) below), any remaining unvested portion of this stock option grant shall thereupon vest.

     (iv) 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.

     (v) 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.

     (e) 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.

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     (f) Special Transaction Bonus.

     (a) In the event a third party purchases all, or substantially all, of the stock or assets of the Company (a “Change of Control Transaction”) prior to the closing of the Company’s current IPO process or the Company’s next private equity financing, upon the closing of such transaction, Employee will receive a transaction bonus in the amount of $150,000. The right to receive this transaction bonus will expire upon the closing of the IPO or the completion of the next private equity financing.

     (b) In the event the current IPO process does not occur, the Company elects to raise capital in a private equity financing, and a Change of Control Transaction occurs subsequent thereto (but prior to any IPO of the Company), Employee will be entitled to a special transaction bonus. 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 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 (net of acquisition cost) to acquire shares of capital stock of the Company (“Employee’s Equity”), will result in Employee receiving total proceeds equal to nine-tenths of one percent (0.9%) of the net proceeds payable to the Company’s stockholders and holders of outstanding options and/or warrants in such Change in Control transaction. The right to receive this special cash transaction bonus will expire upon any IPO of the Company.

     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 continuation law and the Consolidated Omnibus Budget Reconciliation Act of 1986, 29 U.S.C. §§ 1161-1168; 26 U.S.C. §

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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 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

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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 6(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.  Section 409A Compliance. The Company will, to the extent necessary and only to the extent necessary, modify the timing of delivery of severance benefits if the Company determines that the timing would subject the severance benefits to any additional tax or interest assessed under Section 409A of the Internal Revenue Code. In such event, the payments will occur as soon as practicable without causing the severance benefits to trigger such additional tax or interest under Section 409A of the Internal Revenue Code.

     6. 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; or

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     (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.

     (b) “Termination” shall mean separation from service as defined by Section 409A of the Internal Revenue Code.

     (c) “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; or

     (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.

     (d) “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

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     (iv) Any criminal indictment, presentment, or conviction for a felony, whether or not the Company is the victim of such offense.

     (e) “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.

     (f) “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.

     7. 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.

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     8. 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 9 and 13 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.

     9. 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 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 8 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 9 shall have no application to claims by the Company asserting violation of or seeking to enforce, by injunction or otherwise, the terms of Company’s 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.

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     10. 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.

     11. 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 listed below:

If to:	Restore Medical, Inc.
	2800 Patton Road
	St. Paul, MN 55113
	Attention: Board of Directors
If to:	Employee
	Christopher Geyen
	2528 Wood Duck Trail
	Shakopee, MN 55379

     Either party hereto may change its address for purposes of this Section 11 by giving 15 days’ prior written notice to the other party hereto.

     12. 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.

     13. 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.

     14. 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

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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’ Nondisclosure Agreement, as incorporated by reference in Section 9(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/ J. Robert Paulson, Jr.	/s/ Christopher Geyen
	Name: J. Robert Paulson, Jr.	Christopher Geyen
	Title: President & CEO

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EX-10.17

EXHIBIT 10.17

CHANGE IN CONTROL AGREEMENT

     This Change in Control Agreement (“Agreement”) is made effective as of March 13, 2006, by and between Restore Medical Inc., a Minnesota corporation (the “Company”), and John Foster, an individual resident of Minnesota (the “Employee”).

     WHEREAS, the Company desires to employ Employee as its Senior Vice President of Commercial Operations, 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 March 13, 2006, 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 Senior Vice President of Commercial Operations, subject and reporting to the President and Chief Executive Officer (“CEO”). 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 President and CEO 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 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 $17,853.33 monthly, which equates to an annualized Base Salary of $214,240.00, 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 the Company’s Management Incentive Plan, as such plan may be amended from time to time. Employee’s target bonus under the Management Incentive Plan shall be 25% of Base Salary. 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.

     (c) 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.

     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

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be entitled to receive six (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 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 twelve (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 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

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amounts already vested or earned by but unpaid to the Employee as of the date of termination, the Employee shall be entitled to receive twelve (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 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 twelve (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 6(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.  Section 409A Compliance. The Company will, to the extent necessary and only to the extent necessary, modify the timing of delivery of severance benefits if the Company determines that the timing would subject the severance benefits to any additional tax or interest assessed under Section 409A of the Internal Revenue Code. In such event, the payments will occur as soon as practicable without causing the severance benefits to trigger such additional tax or interest under Section 409A of the Internal Revenue Code.

     6. 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

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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; or

     (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.

     (b) “Termination” shall mean separation from service as defined by Section 409A of the Internal Revenue Code.

     (c) “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; or

     (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.

     (d) “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;

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     (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.

     (e) “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.

     (f) “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.

     7. 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 twelve (12) months following a Change in Control, without Cause.

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     (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.

     8. 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 9 and 13 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.

     9. 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 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 8 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).

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     (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 the 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.

     10. 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.

     11. 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 listed below:

If to:	Restore Medical, Inc.
	2800 Patton Road
	St. Paul, MN 55113
	Attention: Board of Directors
	If to:	Employee
		9549 Hillingdon Rd
		Woodbury, Minnesota 55125

     Either party hereto may change its address for purposes of this Section 11 by giving 15 days’ prior written notice to the other party hereto.

     12. 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.

     13. 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.

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     14. 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 9(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/ J. Robert Paulson, Jr.	/s/ John Foster
	Name: J. Robert Paulson, Jr.	John Foster
	Title: President & CEO

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EX-10.18

EXHIBIT 10.18

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO (1) REGISTRATION IN COMPLIANCE WITH SUCH ACT AND SUCH STATE LAWS OR (2) AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED.

RESTORE MEDICAL, INC.

CONVERTIBLE PROMISSORY NOTE
 

$675,000.00 October 31, 2002
as amended June 12, 2003 and December 9, 2003

     For Value Received, the undersigned Restore Medical, Inc. (f/k/a Pi Medical, Inc.), a Minnesota corporation (the “Company”), hereby promises to pay to the order of Venturi I, LLC (“Holder”), at its principal office at 2800 Patton Road, St. Paul, Minnesota 55113, the principal sum of Six Hundred Seventy-Five Thousand and 00/100 Dollars ($675,000.00). Interest shall be payable on the unpaid principal balance of this Note, computed on the basis of actual number of days elapsed and a year of 360 days, from the date hereof at the rate of 12% per annum. Unless converted as provided below, the outstanding principal of, and interest accrued on, this Note will mature and shall be due and payable on December 31, 2003 (the “Maturity Date”). This Note may be prepaid, at the option of the Company, without penalty in whole or in part at any time and from time to time after issue and prior to the Maturity Date.

     In the event of an equity financing by the Company, all of the outstanding principal of and interest accrued on this Note shall automatically convert into the securities offered in such financing, at a conversion price equal to the offering price per share in such financing.

     The Company shall pay all expenses, court costs and reasonable attorneys’ fees which may be incurred in connection with the collection of or attempts to collect any amounts due under this Note.

     The Company hereby waives presentment of this Note, demand, protest, dishonor and notice of dishonor.

     This Note shall be governed by the laws of the State of Minnesota without regard to its conflicts of laws rules.

     Amendment. This Note is intended to amend by substitution the Note dated as of October 31, 2002, as amended June 12, 2003, made by the Company in favor of Venturi I, LLC.

RESTORE MEDICAL, INC.
By	/s/ Susan L. Critzer
	Name:	Susan L. Critzer
	Title:	President

EX-10.19

EXHIBIT 10.19

RESTORE MEDICAL, INC.

BRIDGE LOAN AGREEMENT

     THIS BRIDGE LOAN AGREEMENT (this “Agreement”) is made and entered into as of June 16, 2003, by and among Restore Medical, Inc., a Minnesota corporation (the “Company”), and each of the investors listed on Schedule A hereto (the “Purchasers”).

     WHEREAS, the Company wishes to sell and each of the Purchasers desires to purchase subordinated convertible notes and warrants to purchase shares of the Company’s common stock, $.01 par value (“Common Stock”);

     NOW, THEREFORE, the parties hereto hereby agree as follows:

     1. Authorization of the Notes and Warrants. The Company will have authorized, on or before the First Closing (as defined herein), the issuance and sale of subordinated convertible notes up to an aggregate principal amount of $5,374,462.49, substantially in the form attached hereto as Exhibit A (collectively, the “Notes”), and warrants to purchase up to an aggregate of 224,000 shares of the Company’s Common Stock, substantially in the form attached hereto as Exhibit B (collectively, the “Warrants”).

     2. Sale and Purchase of Notes and Warrants. Subject to the terms and conditions hereof, the Company will issue and sell to each Purchaser, and each Purchaser will purchase from the Company: (a) up to the principal amount of Notes equal to the amount of committed capital set forth opposite the name of each such Purchaser on Schedule A attached hereto, less the “Purchase Price of Warrant” (as defined below), and (b) in exchange for the Purchase Price of Warrant, a Warrant to purchase the number of shares of Common Stock set opposite the name of each such Purchaser at an exercise price of $0.55 per share. “Purchase Price of Warrant” shall mean the price paid by the Purchasers to receive each Warrant, which amount shall be equal to the amount set forth opposite the name of each Purchaser on Schedule A attached hereto. The Notes and the Warrants are hereinafter collectively referred to as the “Securities.” Each Note shall be convertible into shares of the Company’s equity securities issued in a Qualifying Financing (as defined below) pursuant to Section 7.1 below and shall be secured by assets of the Company as described in Section 3.2(c) below, the Notes, and the Security Agreement dated as of the date hereof and attached hereto as Exhibit C.

     3. Closing Date; Delivery and Payment.

          3.1. Closing Date. The first closing of the purchase and sale of the Securities hereunder (the “First Closing”), as well as each subsequent closing of the purchase and sale of any Securities pursuant to the exercise of the Company’s call rights set forth in Section 3.2(b) below (each, a “Subsequent Closing”), will be held at the Company’s principal offices or at the offices of Dorsey & Whitney LLP on the dates agreed upon by the Company and Purchasers purchasing a majority in interest of the aggregate principal amount of the Notes.

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          3.2. Delivery and Payment.

          (a) At the First Closing, the Company shall deliver to each Purchaser a Note registered in the name of each Purchaser, representing fifty percent (50%) of the aggregate principal amount set forth opposite the name of such Purchaser on Schedule A attached hereto, less the Purchase Price of Warrant for such Purchaser, together with a Warrant to purchase the number of shares of Common Stock set forth opposite the name of such Purchaser on Schedule A attached hereto. At the First Closing, each Purchaser shall pay to the Company by check or wire transfer an amount equal to fifty percent (50%) of the aggregate principal amount set forth opposite the name of such Purchaser on Schedule A attached hereto.

          (b) The Company shall have the right to call the remaining aggregate principal amount of Notes, in minimum increments of 25% of the aggregate principal amount of the Notes, on one or more dates subsequent to the First Closing, but in any event no later than August 30, 2003 (each a “Call”). In order to call any of the remaining aggregate principal amount of the Notes, the Company shall provide at least fourteen (14) days’ notice to the Purchasers, at the address shown on Schedule A attached hereto, substantially in the form of notice attached hereto as Exhibit D (the “Call Notice”); provided, however, (x) that each respective Call shall have been separately approved by the disinterested members of the Company’s Board of Directors subsequent to the date hereof and (y) there shall not have been a Material Adverse Effect (as defined herein) on the Company subsequent to the date hereof. With respect to each Call, the Company shall deliver the Call Notice by confirmed facsimile transmission or overnight courier service to the Purchasers stating (i) its intention to call additional funds, (ii) the amount of additional funds to be called, (iii) the date on which the additional funds are to be called, and (iv) the purpose for which such additional funds are being called. At each Subsequent Closing, the Company shall deliver to each Purchaser a Note registered in the name of each Purchaser, representing its pro rata share of the aggregate amount of Notes to be issued at such Subsequent Closing. For the purposes of this Agreement, “Material Adverse Effect” means a material adverse effect on the assets, business, properties, operations or condition (financial or otherwise) of the Company, or a material adverse effect on the ability of the Company to perform its obligations under this Agreement; provided however, that in determining whether there has been a Material Adverse Effect, any adverse effect principally attributable to the following shall be disregarded: (I) general political, economic, national security, business, industry or financial market conditions; (II) expenditures by the Company in the ordinary course of business consistent with past practices and reasonable expenditures by the Company in connection with the transactions contemplated by this Agreement; or (III) the taking of any action required by this Agreement.

          (c) The amounts due for principal and accrued interest under the Notes shall be secured by a first priority lien on those specified assets of the Company as provided in a Security Agreement in form and substance mutually acceptable to the Company and the Purchasers; provided, however, that the parties hereto acknowledge and agree that such lien shall be junior to the Comerica Bank-California (“Comerica”) senior security interest in certain assets of the Company, pursuant to the terms and conditions set forth in that certain Loan and Security Agreement dated as of December 19, 2002 between the Company and Comerica; provided further, that the Purchasers and the Company agree and acknowledge that the Purchaser’s

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security interest in assets of the Company contemplated by this Agreement and the Security Agreement shall terminate upon conversion or repayment of the Notes in accordance with the terms and conditions set forth in Section 7 of this Agreement.

     4. Definitions. Unless the context otherwise requires, the terms defined in this Section 4 shall have the meanings herein specified for all purposes of this Agreement.

     “Articles” means the Amended and Restated Articles of Incorporation of the Company attached hereto as Exhibit E.

     “Code” means the Internal Revenue Code of 1986, as amended, and the Treasury Regulations thereunder.

     “Commission” means the Securities and Exchange Commission.

     “Material Adverse Effect” shall mean a material adverse effect upon the business, operations or condition (financial or otherwise) of the Company, or a material adverse effect that otherwise renders the Company unable to perform its ongoing obligations.

     “Person” means any natural person, corporation, limited liability company, association, partnership (general or limited), joint venture, proprietorship, governmental agency, trust, estate, association, custodian, nominee or any other individual or entity, whether acting in an individual, fiduciary, representative or other capacity.

     “Securities Act” means the Securities Act of 1933, as amended from time to time.

     5. Representations and Warranties by the Company. Except as disclosed on the Disclosure Schedule to this Agreement (the “Disclosure Schedule”), the Company represents and warrants to the Purchasers that:

          5.1. Organization and Standing. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Minnesota and has the requisite corporate power and authority to own its properties and to carry on its business as now being conducted and presently proposed to be conducted. The Company has no subsidiaries or direct or indirect equity interest in any other Person. The Company is duly qualified to do business as a foreign corporation in all jurisdictions in which the failure to do so could reasonably be expected to result in a Material Adverse Effect.

          5.2. Articles. As of the date of the First Closing, the effective articles of incorporation of the Company shall be in the form set forth in Exhibit E to this Agreement.

          5.3. Notes and Warrants. The Notes and Warrants, when issued and paid for pursuant to the terms of this Agreement, will be duly and validly authorized, issued and outstanding, fully paid, nonassessable and free and clear of all pledges, liens, encumbrances and restrictions, except as set forth in Section 6.2 hereof. The shares of Common Stock issuable upon conversion of the Warrants have been reserved for issuance and, when issued upon such

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conversion, will be duly and validly authorized, issued and outstanding, fully paid, nonassessable and free and clear of all pledges, liens, encumbrances and restrictions, except as set forth in Section 6.2 hereof.

          5.4. Securities Laws. Based in part upon the representations and warranties of the Purchasers contained in Section 6.1 of this Agreement, no consent, authorization, approval, permit or order of or filing with any governmental or regulatory authority is required under current laws and regulations in connection with the execution and delivery of this Agreement or the offer, issuance, sale or delivery of the Securities, other than the qualifications and filings under certain applicable state securities laws, which qualifications and filings have been or will be effected as a condition of such sales or conversions. The Company has not, directly or through an agent, offered the Securities or any similar securities for sale to, or solicited any offers to acquire such securities from, Persons other than the Purchasers and other accredited investors. Under the circumstances contemplated hereby, the offer, issuance, sale and delivery of the Securities will not under current laws and regulations require compliance with the prospectus delivery or registration requirements of the Securities Act. The shares of Common Stock issuable upon conversion of the Warrants will be issued in compliance with all applicable federal and state securities laws.

          5.5. Corporate Acts and Proceedings. The execution and delivery of this Agreement has been duly authorized by all requisite corporate action on the part of the Company, its officers, directors and stockholders and this Agreement has been duly executed and delivered by an authorized officer of the Company. This Agreement is a valid and binding obligation of the Company enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium, reorganization or other similar laws affecting the enforcement of creditors’ rights generally and as to limitations on the enforcement of the remedy of specific performance and other equitable remedies. The requisite corporate action necessary to the authorization, creation, issuance, execution and delivery of the Securities has been taken by the Company, its officers, directors and stockholders.

          5.6. Litigation. There are no legal actions, suits, arbitrations or other legal, administrative or governmental proceeding or investigation pending or, to the knowledge of the Company, threatened against the Company, or any officer or director of the Company relating to their duties under such position in the Company, or the Company’s properties, assets or business, or that questions the validity of this Agreement or the right of the Company to enter into this Agreement, or to consummate the transactions contemplated hereby, and neither the Company nor any of its officers is aware of any facts which might result in or form the basis for any such action, suit or other proceeding. The Company is not in default with respect to any judgment, order or decree of any court or any governmental agency or instrumentality.

          5.7. Patents and Other Intangible Rights. The Company has sufficient title and ownership of or exclusive licenses to all patents, trademarks, service marks, trade names, domain names, copyrights, trade secrets, information, proprietary rights and processes necessary for its business as now conducted and as proposed to be conducted without any conflict with or infringement of the rights of others, except where failure to do so would not reasonably be expected to have a Material Adverse Effect. The Disclosure Schedule contains a complete list of

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patents and pending patent applications of the Company. There are no outstanding options, licenses or agreements of any kind relating to the foregoing, nor is the Company bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, service marks, trade names, domain names, copyrights, trade secrets, licenses, information, proprietary rights and processes of any other Person. The Company has not received any communications alleging that the Company has violated or, by conducting its business as proposed, would violate any of the patents, trademarks, service marks, trade names, copyrights or trade secrets or other proprietary rights of any other Person. The Company is not aware that any of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of his or her best efforts to promote the interests of the Company or that would conflict with the Company’s business as proposed to be conducted. Neither the execution nor delivery of this Agreement, the carrying on of the Company’s business by the employees of the Company nor the conduct of the Company’s business as proposed, will, to the best of the Company’s knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any of such employees is now obligated. The Company does not believe it is or will be necessary to utilize any inventions of any of its employees (or people it currently intends to hire) made prior to or outside the scope of their employment by the Company.

          5.8. Capital Stock. Immediately prior to the First Closing, the authorized capital stock of the Company shall consist of 15,500,000 shares, 775,000 of which shall have been designated as Series A Convertible Preferred Stock (the “Series A Preferred Stock”), of which 750,000 shares are issued and outstanding, 4,500,000 of which shall have been designated as Series B Convertible Preferred Stock (the “Series B Preferred Stock”), of which 4,185,411 shares are issued and outstanding, 8,500,000 shares of which have been designated as Common Stock, of which 1,633,525 shares are issued and outstanding, and 1,725,000 of which are undesignated shares of capital stock. No person holds or is entitled to any outstanding subscriptions, warrants, options, calls, convertible securities, commitments of sale or similar rights to purchase or otherwise acquire any shares of, or any security convertible into or exchangeable for, the capital stock of, or other ownership interest in, the Company, except for (a) the conversion privileges of the Series A Preferred Stock and the Series B Preferred Stock and (b) currently outstanding options and warrants to purchase 1,301,799 shares of capital stock of the Company. The Company is not a party or subject to any agreement or understanding, and, to the Company’s knowledge, there is no agreement or understanding between any Persons, which affects or relates to the voting or giving of written consents with respect to any capital stock or by a director of the Company.

          5.9. No Conflict. Neither the authorization, execution, delivery or performance of, or compliance with, this Agreement nor the consummation of the transactions contemplated hereby will, with or without the giving of notice or passage of time, (a) result in any breach of, constitute a default under or result in the imposition of any pledges, liens, encumbrances or restrictions upon any asset or property of the Company pursuant to any agreement or other instrument to which the Company is a party or by which it or any of its properties is bound or affected or (b) violate its articles of incorporation or its bylaws.

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          5.10. No Brokers or Finders. No Person has, or will have, as a result of any acts or omission of the Company, any rights, interest or valid claim against the Company or the Purchaser for any commission, fee or other compensation as a finder or broker in connection with the transactions contemplated by this Agreement. The Company will indemnify and hold the Purchaser harmless against any and all liability with respect to any such commission, fee or other compensation which may be payable or determined to be payable by the Company in connection with the transactions contemplated by this Agreement.

     6. Representations and Warranties of the Purchasers; Restrictions on Transfer.

          6.1. Representations and Warranties of the Purchasers. Each Purchaser represents and warrants that:

     (a) The Securities being acquired by such Purchaser hereunder are being purchased for such Purchaser’s own account and not with the view to, or for resale in connection with, any distribution or public offering thereof within the meaning of the Securities Act. Such Purchaser understands that the Securities have not been registered under the Securities Act by reason of their contemplated issuance in transactions exempt from the registration and prospectus delivery requirements of the Securities Act pursuant to Section 4(2) thereof, and that the reliance of the Company and others upon this exemption from such registration is not presently available pursuant to Rule 144 promulgated under the Securities Act by the Commission and that in any event such Purchaser may not sell the Securities pursuant to Rule 144 prior to the expiration of a one-year period after such Purchaser has acquired the Securities.

     (b) The principal office or residence of such Purchaser is the address set forth on Schedule A attached hereto. Such Purchaser is an “accredited investor” as that term is defined in Regulation D promulgated under the Securities Act, and has such knowledge and experience in financial and business matters that such Purchaser is capable of evaluating the merits and risks of the investment to be made hereunder by such Purchaser. Such Purchaser has had access to all of the Company’s material books and records and the Company has made available to such Purchaser at a reasonable time prior to execution of this Agreement the opportunity to ask questions and receive answers concerning the terms and conditions of the sale of securities contemplated by this Agreement and to obtain any additional information as may be necessary to verify the accuracy of information furnished to such Purchaser by the Company.

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     (c) This Agreement has been duly authorized by the requisite action of such Purchaser and has been duly executed and delivered by such Purchaser, and is a valid and binding obligation of such Purchaser enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium, reorganization or other similar laws affecting the enforcement of creditors’ rights generally and as to limitations on the enforcement of the remedy of specific performance and other equitable remedies. No approval of or consent of any Person is or was required to be obtained by such Purchaser for the authorization or execution of this Agreement or the consummation of the transactions contemplated by this Agreement.

     (d) No Person has or will have, as a result of any act or omission by such Purchaser, any right, interest or valid claim against the Company for any commission, fee or other compensation as a finder or broker, or in any similar capacity, in connection with the transactions contemplated by this Agreement. Such Purchaser will indemnify and hold the Company harmless against any and all liability with respect to any such commission, fee or other compensation which may be payable or determined to be payable in connection with the transactions contemplated by this Agreement.

     6.2. Restrictions on Transfer.

     (a) In addition to any legends required under state securities laws, each certificate representing the Securities shall be endorsed with substantially the following legend:

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”). THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR EVIDENCE SATISFACTORY TO THE COMPANY OF AN APPLICABLE EXEMPTION FROM REGISTRATION UNDER THE ACT OR COMPLIANCE WITH RULE 144 UNDER SUCH ACT.

Upon the conversion of any of the Securities, unless the Company receives an opinion of counsel reasonably satisfactory to the Company to the effect that a transfer of the securities issuable upon conversion of the Securities (the “Conversion Stock”) may be made without registration, or unless such Conversion Stock is being disposed of pursuant to a registration under the Securities Act, substantially the same legend shall be endorsed on the certificate evidencing such Conversion Stock.

     (b) Any legend endorsed on a certificate evidencing Securities pursuant to Section 6.2(a) hereof shall be removed, and the Company shall issue a certificate without such legend to the holder of the Securities, if the Securities are being disposed of pursuant to a registration under the Securities Act or if such holder provides the Company with an opinion of counsel reasonably satisfactory to the Company to the effect that a transfer of the Securities may be made without registration.

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     (c) Notwithstanding the provisions of paragraphs (a) and (b) above, no such registration statement or opinion of counsel shall be necessary for (i) a transfer by a Purchaser that is a partnership to a partner of such partnership or a retired partner of such partnership who retires after the date hereof, or to the estate of any such partner or retired partner, (ii) a transfer by a Purchaser that is an LLC to a member of such LLC or to the estate of any member, (iii) the transfer by gift, will or intestate succession of any Purchaser to his or her spouse or to the siblings, lineal descendants or ancestors of such Purchaser or his or her spouse, or a trust primarily for the benefit of such persons, (iv) the transfer by a Purchaser to a corporation, limited liability company or limited partnership, at least 80% of the equity interests of which are owned by such Purchaser if the transferee agrees in writing to be subject to the terms hereof to the same extent as if he or she were an original Purchaser hereunder or (v) the transfer by a Purchaser to an affiliate of or successor trustee to such Purchaser; provided, that in each of the foregoing, such transfer is made in accordance with all applicable laws.

     7. Conversion of Notes; Repayment Provisions; Events of Default.

          7.1. Automatic Conversion. The principal amount payable pursuant to the Notes, together, at the election of each Purchaser, with any interest thereon, shall automatically be converted into fully paid and nonassessable shares of the Company’s equity securities issued in a Qualifying Financing. A “Qualifying Financing” means an equity financing pursuant to one or more private placements of equity securities resulting in aggregate gross proceeds of at least $10,000,000, excluding the amount of any Notes converted in such financing. The price at which each share is offered in such private placement shall be deemed the “Sales Price” (subject to customary adjustments for stock splits, stock dividends, recapitalizations or other similar events) for purposes of this Agreement. The number of shares of equity securities to which the Purchasers shall be entitled upon such conversion shall equal the principal amount owing under the Notes (together with any interest thereon, if the Purchasers elect to convert such interest), divided by seventy-five percent (75%) of the Sales Price.

          7.2. Mechanics of Conversion. Upon conversion of the Notes under Section 7.1, (a) the principal amount of the Notes automatically shall be converted as provided herein; (b) if the Purchasers do not elect to have the accrued interest on the Notes converted into equity securities pursuant to Section 7.1, such interest shall be paid in cash by the Company to the holders of the Notes upon conversion of the principal amount of the Notes; (c) the Purchasers shall deliver the Notes to the Company for cancellation; and (d) this Agreement and the Notes shall immediately become null, void, and of no further force and effect regardless of their delivery to and receipt by the Company.

          7.3. No Fractional Shares. No fractional shares shall be issued upon the conversion of the Notes. If the conversion of the Notes results in any fraction of a share, the Company shall make payment in cash for such fractional interest, calculated on the basis of 75% of the Sales Price per full share, or as may be adjusted pursuant to the terms hereof.

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          7.4 Repayment of Notes at Maturity Date. The aggregate principal amount of the Notes, together with any interest accrued thereon, shall be due and payable on December 31, 2003 (the “Maturity Date”), provided the Company has not consummated a Qualifying Financing prior to the Maturity Date. The Company shall not be permitted to prepay any principal amount of the Notes or any interest accrued thereon.

          7.5 Repayment of Notes upon Liquidation. Notwithstanding the foregoing, in the event of (a) any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, (b) any consolidation, merger or sale of all or substantially all of the assets of the Company, or (c) any transfer of more than fifty percent (50%) of the voting power of the Company, in each case prior to the earlier of the consummation of a Qualifying Financing or the Maturity Date, the Purchasers shall be entitled to receive in cash upon such event an amount equal to (x) the product of the principal amount accrued under the Notes multiplied by three, plus (y) the amount of any interest accrued on the Notes.

          7.6 Events of Default. The unpaid principal amount of each Note, together with accrued interest thereon, shall become immediately due and payable without any action on the part of the holder thereof upon the happening of any of the following events (each an “Event of Default”):

     (a) if default shall be made by the Company in the payment of interest on or principal of any of the Notes when and as the same shall become due and payable; or

     (b) if default shall be made in the due performance or observance of any other expressed or implied covenant, agreement or provision of the Notes or of this Agreement and such default shall have continued uncured for a period of thirty days after written notice thereof to the Company from the holder of any outstanding Note; or

     (c) if the Company shall:

     (i) admit in writing its inability to pay its debts generally as they become due; or

     (ii) file a petition in bankruptcy or for reorganization or for the adoption of an arrangement under the Bankruptcy Act (as now or in the future amended) or seeking similar relief or consent to such a filing against it or involuntarily have such a petition filed against it which is not dismissed or stayed within 30 days; or

     (iii) make an assignment for the benefit of its creditors; or

     (iv) consent to the appointment of a receiver for all or a substantial part of its property; or

     (v) be adjudicated a bankrupt; or

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     (vi) have entered against it a court order appointing a receiver or trustee for all or a substantial part of its property without its consent, which order shall not be vacated, set aside or stayed within 30 days from the date of entry; or

     (vii) have a court or competent jurisdiction order the assumption or custody or sequestration of all or substantially all of its property, which custody or sequestration shall not be suspended or terminated within 30 days from its inception.

     8. Affirmative Covenants of the Company. The Company covenants and agrees that, so long as any of the Notes remain outstanding:

          8.1. Corporate Existence. The Company will maintain its corporate existence in good standing.

          8.2. Books of Account and Reserves. The Company will keep, and will cause any subsidiary to keep, books of record and account in which full, true and correct entries are made of all of its and their respective dealings, business and affairs, in accordance with generally accepted accounting principles. For the year ending December 31, 2003, the Company will employ certified public accountants who are “independent” within the meaning of the accounting regulations of the Commission. At such time, the Company will have annual audits made by such independent public accountants in the course of which such accountants shall make such examinations, in accordance with generally accepted auditing standards, as will enable them to give such reports or opinions with respect to the financial statements of the Company and its subsidiaries as will satisfy the requirements of the Commission in effect at such time with respect to reports or opinions of accountants. At such time as independent public accountants are employed by the Company, management will request such independent public accountants to issue to the Company a management letter of recommendations in connection with each annual audit of the financial statements of the Company. In the event the services of the independent public accountants are terminated, the Company will promptly notify the Purchaser of such termination and will request such independent public accountants to send a letter to the Purchaser advising them in the detail requested by them of the reasons for the termination of their services.

          8.3. Furnishing of Financial Statements and Information. So long as a Purchaser and its affiliates collectively hold at least 20% of the issued and outstanding Notes, the Company will deliver to such Purchaser:

     (a) within five days of their availability, but in any event within 45 days after the close of each month, (i) an unaudited consolidated balance sheet of the Company and any subsidiaries as of the end of such month and the corresponding balance sheet from the budget as of such month, (ii) the related unaudited combined operating statements for such month and the fiscal year to date and the corresponding statements from the budget for such month and the fiscal year to date, (iii) the related consolidated statement of cash flows for the current month, all in reasonable detail, subject to year-end adjustments, and (iv) the monthly reporting form in a form to be agreed upon by the parties, which reporting form may, in the Purchasers’ discretion, take the place of the foregoing items (i), (ii) and (iii);

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     (b) within five days of their availability, but in any event within 90 days after the end of each fiscal year, a consolidated balance sheet of the Company and any subsidiaries, as of the end of such fiscal year, together with the related consolidated statements of income and retained earnings and statements of cash flows for such fiscal year, setting forth in comparative form figures for the previous fiscal year, all in reasonable detail and duly certified by the Company’s independent public accountants, which accountants shall have given the Company an opinion, unqualified as to the scope of the audit, regarding such statements;

     (c) within fifteen days after the Company learns of the commencement or threatened commencement of any material suit, legal or equitable, or of any material administrative, arbitration or other proceeding against the Company or its business, assets or properties, written notice of the nature and extent of such suit or proceeding;

     (d) promptly after the submission thereof to the Company, copies of the management letter and any other reports or recommendations submitted by independent public accountants in connection with any annual or interim audit or the accounts of the Company or any of its subsidiaries made by such accountants;

     (e) with reasonable promptness, such other financial data relating to the business, affairs and financial condition of the Company and any subsidiaries as is available to the Company and as from time to time the Purchasers may reasonably request.

          The Company’s obligations under paragraphs 8.3(a) through (e) shall terminate upon the earlier of (i) conversion or repayment of the Notes and (ii) the closing of a public offering pursuant to an effective registration statement on Form S-1 (or any successor form) under the Securities Act for an offering price per share of not less than $3.00 and with gross proceeds of at least $20,000,000.

          8.4. Inspection and Attendance. So long as a Purchaser and its affiliates collectively hold at least 20% of the issued and outstanding Notes, the Company will permit such Purchaser and any of its partners, officers or employees, or any outside representatives designated by the Purchaser and reasonably satisfactory to the Company, to attend meetings of the Board of Directors as an observer and to visit and inspect at the expense of such Purchaser, except for any expenses required to be borne by the Company under Minnesota Statutes, Section 302A.461, as now in effect or hereafter amended or succeeded, any of the properties of the Company or its subsidiaries, including their books and records (and to make photocopies thereof or extracts therefrom), and to discuss their affairs, finances and accounts with their officers, except with respect to trade secrets and similar confidential information, all to such reasonable extent and at such reasonable times and intervals as such Purchaser may reasonably request without disruption of the Company’s operations.

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          8.5 Management Incentive Plan. Prior to the First Closing, the Company shall cause its Board of Directors to adopt a management incentive plan (the “Incentive Plan”) substantially in the form attached hereto as Exhibit F.

     9. Negative Covenants of the Company. So long as the Purchasers and their affiliates collectively hold at least 20% of the aggregate principal amount of the Notes then issued pursuant to this Agreement and which remain outstanding, without the approval of holders of a majority of the outstanding aggregate principal amount of the Notes, the Company will be limited and restricted as follows:

          9.1. Consolidation, Merger Acquisition, etc. Neither the Company nor any subsidiary will sell, lease or otherwise dispose of all or substantially all of its assets, or consolidate with or merge into any other corporation or entity, or permit any other corporation or entity to consolidate or merge into it, except that any subsidiary may merge into another subsidiary or the Company.

          9.2. Capital Expenditures and Leases. Neither the Company nor any subsidiary will pay or incur aggregate expenditures exceeding $100,000 for any one transaction or exceeding the aggregate amounts set forth in the annual plan approved by the Board of Directors without the prior approval of the Board of Directors.

          9.3. Other Restrictions. The Company and any subsidiary will not:

     (a) guarantee, endorse or otherwise be or become contingently liable in connection with the obligations, securities or dividends of any Person other than the Company or a subsidiary, except that the Company and any subsidiary may endorse negotiable instruments for collection in the ordinary course of business;

     (b) make loans or advances to any Person (including without limitation to any officer, director or stockholder of the Company or any subsidiary), except advances to suppliers made in the ordinary course of business; or

     (c) purchase or invest in the stock or obligations of any other Person other than a subsidiary, except for indirect investments in investment-grade corporate securities through the Company’s money market accounts.

     10. Miscellaneous.

          10.1. Waivers and Amendments. With the written consent of the record holders of a majority of the outstanding aggregate principal amount of the Notes, the obligations of the Company under the Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), and with the same consent the Company may enter into a supplementary agreement for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement, or of any supplemental agreement or modifying in any manner the rights and obligations created hereunder or thereunder.

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          10.2. Notices. All notices, requests, consents and other communications required hereunder shall be in writing and shall be personally delivered, sent by delivery service or mailed (in either case with 3-day delivery guaranteed), to the addresses listed below, or at such other address as the Company or the Purchasers may specify by written notice:

To the Company:	With copies to:
Restore Medical, Inc.	Dorsey & Whitney LLP
2800 Patton Road	50 South Sixth Street
St. Paul, Minnesota 55113	Minneapolis, Minnesota 55402
Attention: Chief Executive Officer	Attention: Kenneth L. Cutler, Esq.
To the Purchasers:
The addresses listed on Schedule A
attached hereto

Such notices and other communications shall for all purposes of this Agreement be treated as being effective or having been given if delivered personally, or, if sent by mail or delivery service, when received.

          10.4. Survival of Representations and Warranties. All representations and warranties contained herein shall survive the execution and delivery of this Agreement, any investigation at any time made by or on behalf of the Purchasers, and the sale and purchase of the Securities and payment therefor. All statements contained in any certificate, instrument or other writing delivered by or on behalf of the Company pursuant hereto or in connection with or in contemplation of the transactions herein contemplated shall constitute representations and warranties by the Company hereunder.

          10.5. Parties in Interest. All the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto but shall inure to the benefit of and be enforceable by the holder or holders from time to time of any of Securities only to the extent herein specifically provided.

          10.6. Assignability. This Agreement may not be assigned by the Company or the Purchasers without the prior written consent of the other parties, except that, upon notice to the Company, any Purchaser may assign this Agreement to an entity which, directly or indirectly, is controlled by or is under common control with such Purchaser.

          10.7. Amendment. This Agreement may not be amended, changed, modified or discharged, except by a writing signed by the Company and the Purchasers holding a majority of the principal amount of the Notes issued pursuant hereto.

          10.8. Expenses. The Company will pay its own respective fees and expenses and the reasonable expenses incurred by the Purchasers and no more than one counsel acting on behalf of such Purchasers in connection with this Agreement and the sale and purchase of the Securities and the other transactions described in and contemplated by this Agreement.

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          10.9. Severability. If any provision contained herein is held to be invalid or unenforceable by a court of competent jurisdiction, such provision will be severed herefrom and such invalidity or unenforceability will not affect any other provision of this Agreement, the balance of which will remain in and have its intended full force and effect; provided, however, if such invalid or unenforceable provision may be modified so as to be valid and enforceable as a matter of law, such provision will be deemed to have been modified so as to be valid and enforceable to the maximum extent permitted by law.

          10.10. Headings. The headings of the sections of this Agreement have been inserted for convenience of reference only and do not constitute a part of this Agreement.

          10.11. Choice of Law. It is the intention of the parties that the internal laws of the State of Minnesota, without regard to the body of law controlling conflicts of law, shall govern the validity of this Agreement, the construction of its terms and the interpretation of the rights and duties of the parties.

          10.12. Counterparts. This Agreement may be executed concurrently 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.

[The remainder of this page is intentionally left blank; signature page follows]

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     IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered by their proper and duly authorized representatives as of the day and year first above written.

RESTORE MEDICAL, INC.
By	/s/ Susan L. Critzer
	Name:	Susan L. Critzer
	Title:	President and Chief Executive Officer

     IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered by their proper and duly authorized representatives as of the day and year first above written.

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:	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        Special Limited Partner By: MPM Asset Management II, LLC, its General Partner
By:	Luke Evnin
	Name:	Luke Evnin
	Title:	Manager
MPM ASSET MANAGEMENT INVESTORS 2000B LLC
By:	Luke Evnin
	Name:	Luke Evnin
	Title:	Manager

     IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered by their proper and duly authorized representatives as of the day and year first above written.

CHARTER VENTURES II, L.P.
By:	/s/ A. Barr Dolan
	Name:	A. Barr Dolan
	Its:
EVENTYR INVESTMENTS, L.P.
By:	/s/ Roz H. Hatler
	Name:	Roz H. Hatler
	Its:	General Partner
/s/ Mark B. Knudson
Mark B. Knudson, Ph.D.
/s/ Timothy I. Maudlin
Timothy I. Maudlin
/s/ Robert S. Nickoloff
Robert S. Nickoloff

EX-10.20

EXHIBIT 10.20

AMENDMENT NO. 1 TO
BRIDGE LOAN AGREEMENT

     This Amendment No. 1 (“Amendment No. 1”) to that certain Bridge Loan Agreement dated June 16, 2003 (the “Agreement”) by and among Restore Medical, Inc., a Minnesota corporation (the “Company”), and the investors listed on Schedule A thereto (the “Purchasers”) is made and entered into this 9^th day of December, 2003 by and among the Company and the Purchasers. Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Agreement.

     WHEREAS, pursuant to Section 10.7 of the Agreement, the parties reserved the right to amend the Agreement.

     WHEREAS, the parties desire to amend the Agreement, and, in accordance with Section 10.7 of the Agreement, this Amendment No. 1 has been authorized and approved by the Company and Purchasers holding at least a majority of the principle amount of the Notes issued pursuant to the Agreement.

     NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the Company and the undersigned Purchasers agree to and hereby amend and modify the following sections, paragraphs, and terms of the Agreement in the following respects:

     1. Section 1 of the Agreement is deleted in its entirety, and the following is substituted in its place:

     “1. Authorization of the Notes and Warrants. The Company has authorized the issuance and sale of subordinated convertible notes up to an aggregate principal amount of $5,374,462.49, bearing interest at a rate of 12% per annum, substantially in the form attached hereto as Exhibit A (collectively, the “Notes”), and warrants to purchase up to an aggregate of 671,914 shares of the Company’s Common Stock, substantially in the form attached hereto as Exhibit B (collectively, the “Warrants”).”

     2. Clause (b) of Section 2 of the Agreement is deleted in its entirety, and the following is substituted in its place:

     “(b) in exchange for the Purchase Price of Warrant, a Warrant to purchase the number of shares of Common Stock set forth opposite the name of each such Purchaser at an exercise price of $0.01 per share.”

     3. The last sentence set forth in Section 7.1 of the Agreement is deleted in its entirety, and the following is substituted in its place:

     “The number of shares of equity securities to which the Purchasers shall be entitled upon such conversion shall equal the principal amount owing under the Notes (together with any interest thereon, if the Purchasers elect to convert such interest), divided by the Sales Price.”

     4. The last sentence set forth in Section 7.3 of the Agreement is deleted in its entirety and the following is substituted in its place:

“If the conversion of the Notes results in any fraction of a share, the Company shall make payment in cash for such fractional interest, calculated on the basis of the Sales Price per full share, or as may be adjusted pursuant to the terms hereof.”

     5. Schedule A to the Agreement is deleted in its entirety and replaced with the amended version of Schedule A attached to this Amendment No. 1.

     6. Entire Agreement. The Agreement, as amended by this Amendment No. 1 (as so amended, the “Amended Agreement”), contains the entire understanding between the parties hereto with respect to the subject matter hereof and shall supersede and terminate any prior understandings, agreements, obligations or representations, written or oral, relating to the subject matter hereof, including, but not limited to the Agreement as originally executed. The parties agree that the Amended Agreement is the result of negotiations between the parties and that the language of the Amended Agreement shall not be construed for or against any particular party.

     7. Counterparts. This Amendment No. 1 may be executed in any number of counterparts, all of which shall constitute a single agreement. Signatures delivered by facsimile transmission shall be deemed original signatures for all purposes.

[The remainder of this page intentionally is left blank; signature page follows]

-2-

          IN WITNESS WHEREOF, the parties have caused this Amendment No. 1 to the Agreement to be duly executed and delivered by their proper and duly authorized representatives as of the day and year first above written.

RESTORE MEDICAL, INC.
By	/s/ Susan L. Critzer
	Name: Susan L. Critzer
	Title: President and Chief Executive Officer

Signature Page to Amendment No. 1 to
Bridge Loan Agreement

     IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered by their proper and duly authorized representatives as of the day and year first above written.

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:	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        Special Limited Partner By: MPM Asset Management II, LLC, its General Partner
By:	Luke Evnin
	Name:	Luke Evnin
	Title:	Manager
MPM ASSET MANAGEMENT INVESTORS 2000B LLC
By:	Luke Evnin
	Name:	Luke Evnin
	Title:	Manager

Signature Page to Amendment No. 1 to
Bridge Loan Agreement

     IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered by their proper and duly authorized representatives as of the day and year first above written.

CHARTER VENTURES II, L.P.
By:	/s/ A. Barr Dolan
	Name:	A. Barr Dolan
	Its:
EVENTYR INVESTMENTS, L.P.
By:	/s/ Roz H. Hatler
	Name:	Roz H. Hatler
	Its:	General Partner
/s/ Mark B. Knudson
Mark B. Knudson, Ph.D.
/s/ Timothy I. Maudlin
Timothy I. Maudlin
/s/ Robert S. Nickoloff
Robert S. Nickoloff

Signature Page to Amendment No. 1 to
Bridge Loan Agreement

EX-10.21

EXHIBIT 10.21

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”). IT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR EVIDENCE SATISFACTORY TO THE PAYOR OF AN APPLICABLE EXEMPTION UNDER THE ACT OR COMPLIANCE WITH RULE 144 UNDER SUCH ACT.

PROMISSORY NOTE

$___	Promissory Note No. ___
	June 16, 2003
	as amended December 9, 2003

     FOR VALUE RECEIVED, the undersigned, Restore Medical, Inc. (“Payor”), hereby promises to pay                                                              (“Payee”) the sum of                                           DOLLARS ($                    ) in lawful currency of the United States of America at the demand of the Payee at any time on or after December 31, 2003. This Note shall bear interest at a rate of 12% per annum, commencing as of June 16, 2003, payable together with principal at maturity. Payment shall be credited first to Costs (as defined below), if any, then to accrued interest due and payable, and any remainder shall be applied to principal.

     This Note is issued pursuant to, and is entitled to the benefits of the provisions of that certain Bridge Loan Agreement, dated as of June 16, 2003, as amended as of December 9, 2003 (the “Bridge Loan Agreement”) between the Payor, the Payee and the others parties thereto; but neither this reference to such Bridge Loan Agreement nor any provision thereof shall affect or impair the absolute and unconditional obligation of the maker of this Note to pay the principal hereof and interest hereon as herein provided. Any capitalized term not otherwise defined herein shall have the meaning ascribed to such term in the Bridge Loan Agreement.

     The holder hereof is entitled to all of the benefits and subject to all of the obligations provided for in the Bridge Loan Agreement, including conversion hereof as provided under Section 7.1 thereof, and repayment in the event of (a) any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, (b) any consolidation, merger or sale of all or substantially all of the assets of the Company, or (c) any transfer of more than fifty percent (50%) of the voting power of the Company as provided under Section 7.5 thereof. Reference is made to the Bridge Loan Agreement for a statement of the terms and conditions under which this indebtedness was incurred (including conversion, waiver, etc.) and the Events of Default under which the promissory note may come due. The provisions of the Bridge Loan Agreement are incorporated by reference herein with the same force and effect as if fully set forth herein.

     This Note shall, upon an Event of Default (as defined in the Bridge Loan Agreement), become immediately due and payable without any notice or other action on the part of the holder hereof, as specified in the Bridge Loan Agreement. This Note may not be prepaid in whole or in part without the consent of the Payee.

     This Note is secured under a security agreement (the “Security Agreement”) between the Payor and the Payee dated as of June 16, 2003, attached hereto as Exhibit A. Reference is hereby made to the Security Agreement for a description of the nature and extent of the security for this Note and the rights with respect to such security of the holder of this Note.

     The Company hereby agrees, subject only to any limitation imposed by applicable law, to pay all expenses, including reasonable attorneys’ fees and legal expenses, incurred by the holder of this Note (“Costs”) in endeavoring to collect any amounts payable hereunder which are not paid when due, whether by declaration or otherwise. The Company agrees that any delay on the part of the holder in exercising any rights hereunder will not operate as a waiver of such rights. The holder of this Note shall not by any act, delay, omission or otherwise be deemed to have waived any of its rights or remedies, and no waiver of any kind shall be valid unless in writing and signed by the party or parties waiving such rights or remedies.

     This Note has been acquired for investment and has not been registered under the Act. This Note may not be sold, offered for sale, pledged, hypothecated or otherwise transferred in the absence of such registration or evidence satisfactory to Payor of an applicable exemption therefrom under the Act or compliance with Rule 144 under the Act.

     This Note shall be deemed to have been made under and shall be governed by the laws of the State of Minnesota without giving effect to conflict of laws rules and none of its terms or provisions may be waived, altered, modified or amended except as Payor or Payee may consent thereto in writing.

     The Payor and all endorsers of this Note each hereby waives presentment, demand, notice of nonpayment, protest and all other demands and notices in connection with the delivery, acceptance, performance or enforcement of this Note.

     Amendment. This Note is intended to amend by substitution the Note dated as of June 16, 2003, made by the Company in favor of Payee.

     IN WITNESS WHEREOF, Payor has executed and delivered this Note to Payee as of the date first written above.

RESTORE MEDICAL, INC.
By:
	Name: Susan L. Critzer
	Title: President and Chief Executive Officer

EX-10.22

EXHIBIT 10.22

THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”). THIS WARRANT AND SUCH SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR EVIDENCE SATISFACTORY TO THE COMPANY OF AN APPLICABLE EXEMPTION FROM REGISTRATION UNDER THE ACT OR COMPLIANCE WITH RULE 144 UNDER SUCH ACT. THE TRANSFER OF THIS WARRANT IS FURTHER RESTRICTED AS PROVIDED HEREIN.

AMENDED AND RESTATED
COMMON STOCK WARRANT

Warrant No. ___ December 9, 2003

WARRANT TO PURCHASE

_______ SHARES OF COMMON STOCK

OF

RESTORE MEDICAL, INC.

This certifies that as of the date written above (the “Warrant Issue Date”), for value received,                                          (“Holder”) is entitled, subject to the terms set forth below, to purchase from Restore Medical, Inc., a Minnesota corporation (the “Company”), such number of fully paid and non-assessable shares of Common Stock, par value $0.01, of the Company (“Common Stock”), as set forth in Section 2 hereof, (subject to adjustment as provided in Section 10 hereof) upon surrender hereof, at the principal office of the Company referred to below, with the Notice of Exercise attached hereto duly executed, and simultaneous payment thereof in lawful money of the United States or otherwise as hereinafter provided, at the Exercise Price as set forth in Section 2 below. The number, character and Exercise Price of such shares of Common Stock are subject to adjustment as provided below. The term “Warrant” as used herein, shall include this Warrant and any warrants delivered in substitution or exchange therefor as provided herein.

     This Warrant is being issued in connection with a bridge financing of the Company pursuant to a Bridge Loan Agreement, as amended (the “Bridge Loan Agreement”) and related Promissory Note, as amended (the “Note”), each dated as of the date hereof (the “Bridge Financing”). Capitalized terms used herein but not defined herein shall have the meaning set forth in the Bridge Loan Agreement.

1. Term of Warrant. Subject to the terms and conditions set forth herein, this Warrant shall be exercisable in whole or in part; provided however that notwithstanding anything to the contrary herein, this Warrant shall expire upon the earlier of (a) June 16, 2011 and (b) the closing of (i) any consolidation or merger of the Company with or into another entity (except a consolidation

or merger in which the holders of capital stock of the Company immediately prior to such consolidation or merger continue to hold at least 50% of the voting power of the capital stock of the Company or the surviving or acquiring entity) or (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company (any one of which, a “Corporate Transaction”), and shall be void thereafter. In the event of a Corporate Transaction, the Company shall mail notice of such Corporate Transaction to the Holder at least twenty (20) days prior to the consummation of such Corporate Transaction.

2. Exercise Price and Number of Shares.

(A) The Exercise Price at which this Warrant may be exercised shall be $0.01 per share of Common Stock, as adjusted from time to time pursuant to Section 10 hereof.

(B) The number of shares of Common Stock initially issuable upon exercise of this Warrant shall be 46,412.

3. Exercise of Warrant.

(A) Manner of Exercise. The purchase rights represented by this Warrant are exercisable by the Holder in whole or in part, at any time, or from time to time, during the term hereof as described in Section 1 above, by the surrender of this Warrant and the Notice of Exercise attached hereto duly completed and executed on behalf of the Holder, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Holder at the address of the Holder appearing on the books of the Company), together with payment of an amount equal to the Exercise Price multiplied by the number of shares then being purchased, at Holder’s option in cash, by bank cashier’s check or certified check (or other check acceptable to the Company) or by wire transfer to a bank account designated by the Company for that purpose by written notice to Holder.

Notwithstanding the provisions of Section 1, if the Holder has not exercised this Warrant prior to the closing of a Corporate Transaction, this Warrant shall automatically be deemed to be exercised in full in the manner set forth in Section 3(C), without any further action on behalf of the Holder, immediately prior to such closing.

(B) Effective Time of Exercise. This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the Holder entitled to receive the shares of Common Stock issuable upon such exercise shall be treated for all purposes as the holder of record of such shares as of the close of business on such date. As promptly as practicable on or after such date and in any event within ten (10) days thereafter, the Company at its expense shall issue and deliver to the Holder a certificate or certificates in the name of the Holder or as such Holder may direct (upon payment by such Holder of any applicable transfer taxes) for the number of shares issuable upon such exercise. In the event that this Warrant is exercised in part, the Company at its expense will execute and deliver a new warrant of like tenor exercisable for the number of shares then remaining for which this warrant may then be exercised.

(C) Net Issue Exercise.

          (i) In lieu of exercising this Warrant in the manner provided above in Section 3(A), the Holder may elect to receive shares equal to the value of this Warrant (or portion thereof being exercised) by surrender of this Warrant at the principal office of the Company together with notice of such election on the Notice of Exercise form attached hereto duly executed by such Holder or such Holder’s duly authorized attorney, in which event the Company shall issue to such Holder a number of shares computed using the following formula:

	X=Y(A-B)
		A
Where	X =	The number of shares to be issued to the Holder
	Y =	The number of shares purchasable under this Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being cancelled (at the date of such calculation)
	A =	The fair market value of one share of Warrant stock (at the date of such calculation)
	B =	The Exercise Price (as adjusted to the date of such calculation)

          (ii) For purposes of this Section 3(C), the fair market value of one share of Common Stock on the date of calculation shall mean:

               (A) if the exercise is in connection with an initial public offering of the Company’s Common Stock, and if the Company’s Registration Statement relating to such public offering has been declared effective by the Securities and Exchange Commission, then the fair market value of Common Stock shall be the initial “Price to Public” per share specified in the final prospectus with respect to the offering;

               (B) if this Warrant is exercised after, and not in connection with, the Company’s initial public offering, and if the Company’s Common Stock is traded on a securities exchange or The Nasdaq Stock Market or actively traded over-the-counter:

                    (1) if the Company’s Common Stock is traded on a securities exchange or The Nasdaq Stock Market, the fair market value shall be deemed to be the average of the closing prices over a thirty (30) day period ending three days before date of calculation; or

                    (2) if the Company’s Common Stock is actively traded over-the-counter, the fair market value shall be deemed to be the average of the closing

bid or sales price (whichever is applicable) over the thirty (30) day period ending three days before the date of calculation; or

          (C) if neither (A) nor (B) is applicable, the fair market value shall be at the highest price per share which the Company could obtain on the date of calculation from a willing buyer (not a current employee or director) for shares of Common Stock sold by the Company, from authorized but unissued shares, as determined in good faith by the Board of Directors and agreed to by the Holder.

4. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. In lieu of any fractional share to which the Holder would otherwise be entitled, the Company shall make a cash payment equal to the Exercise Price multiplied by such fraction.

5. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity bond or other security in an amount reasonably satisfactory as sufficient security, or in the case of mutilation, on surrender and cancellation of this Warrant, the Company at its expense shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor and amount.

6. Rights of Stockholders.

(A) Limitations on Rights of Warrant. Subject to Section 10 below, the Holder shall not be entitled to vote or receive dividends or be deemed the holder of Common Stock or any other securities of the Company that may at any time be issuable on the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon the Holder, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance of stock, reclassification of stock, change of par value, or change of stock to no par value, consolidation, merger, conveyance or otherwise) or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until the Warrant shall have been exercised as provided herein.

(B) Notices of Certain Transactions. In case:

(a) the Company shall take a record of the holders of its Common Stock and/or preferred stock (or other stock or securities at the time deliverable upon the exercise of this Warrant) for the purpose of entitling or enabling them to receive any dividend or other distribution, or to receive any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right, to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right, or

(b) of any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation or merger of the Company, any consolidation or merger of the Company with or into another corporation

(other than a consolidation or merger in which the Company is the surviving entity), or any transfer of all or substantially all of the assets of the Company, or

(c) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company, or

(d) of the initial public offering of the Company,

then, and in each such case, the Company will mail or cause to be mailed to the Holder a notice specifying, as the case may be, (i) the date on which a record is to be taken for the purpose of such dividend, distribution, or right, and stating the amount and character of such dividend, distribution or right, or (ii) the effective date on which such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation, winding-up, redemption or conversion is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or other stock or securities at the time deliverable upon such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation, winding-up, redemption or conversion) are to be determined. Such notice shall be mailed at least twenty (20) days prior to the record date or effective date for the event specified in such notice.

7. Transfer of Warrant.

(A) Non-transferability of Warrant. This Warrant may be transferred, in whole or part, without consent of the Company, only to an Affiliate of the Holder and to and from the beneficial owner hereof and any nominee from time to time acting as custodian for the beneficial owner hereof, in each case upon receipt of a representation reasonably satisfactory to the Company from the proposed transferee that it is an “accredited investor” as such term is defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933 and is taking this Warrant for his, her or its own account, for investment and not with a view towards distribution or resale. This Warrant may also be transferred, in whole or part, to a non-Affiliate of the Holder with the prior written consent of the Company. For purposes hereof, the term “Affiliate” shall mean any parent, subsidiary, stockholder, partner, retired partner or member of the Holder, and if the beneficial owner of this Warrant is an individual, any spouse, child, heir, legatee, executor or other personal representative of such individual. Any such transfer shall be made only in compliance with all applicable federal and state securities laws.

(B) Exchange of Warrant Upon Transfer. On the surrender of this Warrant in connection with a transfer pursuant to the terms of Section 7(A), the Company, at its expense, shall issue to the successor a new warrant or warrants of like tenor, in the name of the assignees, successors or heirs, who shall thereupon become the Holder(s) thereof, and shall be subject to all of the terms and conditions thereof.

(C) Compliance With Securities Laws.

(1) The Holder of this Warrant, or if the Holder is a custodian, the beneficial owner of this Warrant, by acceptance hereof, acknowledges that this Warrant and the shares of Common Stock to be issued upon exercise hereof are being acquired

solely for the Holder’s (or beneficial owner’s) own account and not as a nominee for any other party, and for investment, and that the Holder will not offer, sell or otherwise dispose of this Warrant or any shares of Common Stock to be issued upon exercise hereof except under circumstances that will not result in a violation of any federal or state securities laws. Upon exercise of the Warrant (other than pursuant to the net exercise provision of Section 3(C)), the Holder shall as a condition to such exercise, if reasonably requested by the Company, confirm in writing, in a form reasonably satisfactory to the Company that the shares of Common Stock so purchased are being acquired solely for the Holder’s own account and not as a nominee for any other party, for investment, and not with a view toward distribution or resale.

(2) All shares of Common Stock issued upon exercise hereof may be stamped or imprinted with a legend in substantially the following form (in addition to any legend required by state securities laws), so long as such legend is required by applicable law:

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”). THESE SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR EVIDENCE SATISFACTORY TO THE COMPANY OF AN APPLICABLE EXEMPTION FROM REGISTRATION UNDER THE ACT OR COMPLIANCE WITH RULE 144 UNDER SUCH ACT.

If the legend is no longer required (as evidenced by a legal opinion for the Holder or the Company or by evidence otherwise reasonably satisfactory to the Company), the Company will promptly remove such legend.

8. Reservation of Stock. During the term of this Warrant, the Company will at all times have authorized and reserved for the purpose of issuance upon exercise of this Warrant, a sufficient number of shares of the Company’s Common Stock to provide for the exercise of this Warrant. If at any time during the term of this Warrant the number of authorized but unissued shares of Common Stock shall not be sufficient to permit exercise of this Warrant, the Company 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. All shares that may be issued upon the exercise of rights represented by this Warrant upon issuance, will be fully paid and non-assessable, free from all taxes, liens and charges in respect of the issuance thereof.

9. Amendments. This Warrant and any term hereof may be changed, waived, discharged or terminated only in accordance with the terms of the Bridge Loan Agreement.

10. Special Provision.

(A) Reclassification. If the Company at any time while this Warrant, or any portion thereof, remains outstanding and unexpired, by reclassification of securities or otherwise,

shall change any of the securities as to which purchase rights under this Warrant exist into the same or a different number of securities of any other class or classes, this Warrant shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as a result of such change with respect to the securities that were subject to the purchase rights under this Warrant immediately prior to such reclassification or other change and the Exercise Price therefore shall be appropriately adjusted, all subject to further adjustment as provided in this Section 10.

(B) Split, Subdivision, Reverse Split or Combination or Shares. If the Company at any time while this Warrant, or any portion thereof, remains outstanding and unexpired shall issue additional shares of its Common Stock as a dividend with respect to any shares of its Common Stock, or split, subdivide, reverse split or combine the securities as to which purchase rights under the Warrant exist, into a different number of securities of the same class, the Exercise Price per share for such securities shall be proportionately decreased in the case of a stock dividend, split or subdivision or proportionately increased in the case of a combination or reverse split and the number of shares which the Holder hereof shall be entitled to receive upon exercise shall be correspondingly appropriately adjusted.

(C) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment pursuant to this Section 10, the Company at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and promptly mail to each Holder of this Warrant a certification of the Company’s Chief Financial Officer setting forth in detail (i) the facts requiring such adjustment, (ii) the Exercise Price after such adjustment and (iii) the kind and amount of stock or other securities or property into which this Warrant shall be exercisable after such adjustment.

11. No Impairment. The Company will not avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith use its best efforts to carry out all of the provisions of this Warrant, including without limitation, the provisions of Section 10, and to take all such action as may be necessary or appropriate in order to protect the exercise rights of the Holder against impairment.

12. Miscellaneous.

(A) Notices. Any notice required or permitted under this Warrant shall be in writing sent by hand or certified or registered, first class mail, return receipt requested, to:

Holder:	At the address set forth for the original Holder hereof in Schedule A to the Bridge Loan Agreement.
Company:	Restore Medical, Inc.
	2800 Patton Drive
	St. Paul, MN 55113
	Attention: President and Chief Executive Officer

or to such other address of which either party shall notify the other by similar notice.

(B) Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the State of Minnesota, without regard to its conflicts of law provisions.

(C) Successors. This Warrant shall be binding upon any successor(s) or assign(s) of the Company.

(D) Headings. The headings used in this Warrant are used for convenience only and are not to be considered in construing or interpreting this Warrant.

     (E) Saturdays, Sundays, and Holidays. If the expiration date of this Warrant falls on a Saturday, Sunday or a Holiday, the term of this Warrant shall be extended to the next business day. “Holiday” as used herein means any day on which the principal office of the Company is officially closed or which is a bank closing day for banks in New York or in the Federal Reserve System. “Close of business” as used herein means close of business in the State of New York.

13. Amendment. This warrant is intended to amend by substitution the Common Stock Warrant dated as of June 16, 2003, made by the Company in favor of Holder.

IN WITNESS WHEREOF, Restore Medical, Inc. has caused this Warrant to be executed by its officer thereunto duly authorized.

Dated: December 9, 2003

RESTORE MEDICAL, INC.
By
	Name: Susan L. Critzer
	Title: President and Chief Executive
	Officer

NOTICE OF EXERCISE

To Restore Medical, Inc.:

1. The undersigned hereby elects to purchase                      shares of Common Stock of Restore Medical, Inc., par value $0.01, pursuant to the terms of the attached Warrant:

[Check Appropriate Box]

o	a.	Tenders herewith payment of the exercise price for such shares in full.
o	b.	Elects to exercise this Warrant for                      shares purchasable pursuant to the Warrant pursuant to the net exercise provisions of Section 3(C).

2. If the undersigned is exercising this Warrant pursuant to 1 (a) above, the undersigned hereby confirms and acknowledges that the shares of the Common Stock to be issued upon exercise thereof are being acquired solely for the account of the undersigned and not as a nominee for any other party, and for investment and not with a view towards distribution, and that the undersigned will not offer, sell or otherwise dispose of any such shares of Common Stock except under circumstances that will not result in a violation of the Securities Act of 1933, as amended, or any state securities laws.

3. Please issue a certificate or certificates representing said shares of the Common Stock in the name of the undersigned or in such other name as is specified below.

4. Please issue a new Warrant for the unexercised portion (if any) of the attached Warrant.

Signature	Date
Name                                                             [PLEASE PRINT]

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

April 14, 2006

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

EX-99.1

EXHIBIT 99.1

CONSENT OF DIRECTOR-NOMINEE

     This Consent of Director-Nominee is delivered in connection with the registration statement on Form S-1 (Registration No. 333-132368) (as it may be amended from time to time, the “Registration Statement”) of Restore Medical, Inc. for the registration under the Securities Act of 1933, as amended, of up to $50,000,000 of common stock of Restore Medical, Inc.

     The undersigned consents to (a) the references made to him in the Registration Statement and related prospectus as having consented to serve as a director of Restore Medical, Inc. effective immediately after the completion of the offering contemplated by the Registration Statement and such prospectus and (b) the inclusion of certain biographical information regarding him in the Registration Statement and related prospectus.

April 11, 2006	/s/ Richard J. Nigon
	Richard J. Nigon

EX-99.2

EXHIBIT 99.2

CONSENT OF DIRECTOR-NOMINEE

     This Consent of Director-Nominee is delivered in connection with the registration statement on Form S-1 (Registration No. 333-132368) (as it may be amended from time to time, the “Registration Statement”) of Restore Medical, Inc. for the registration under the Securities Act of 1933, as amended, of up to $50,000,000 of common stock of Restore Medical, Inc.

     The undersigned consents to (a) the references made to him in the Registration Statement and related prospectus as having consented to serve as a director of Restore Medical, Inc. effective immediately after the completion of the offering contemplated by the Registration Statement and such prospectus and (b) the inclusion of certain biographical information regarding him in the Registration Statement and related prospectus.

April 11, 2006	/s/ Howard P. Liszt
	Howard P. Liszt

CORRESP

[Dorsey & Whitney LLP ]

April 14, 2006

Securities and Exchange Commission
Division of Corporation Finance
100 F Street N.E.
Washington, DC 20549

Attn: Mr. Timothy Buchmiller
Mailstop 6010

VIA FACSIMILE AND EDGAR

     Re.      Restore Medical, Inc.
     Registration Statement on Form S-1
     Filed March 13, 2006
     Registration No. 333-132368

Dear Mr. Buchmiller:

     On behalf of Restore Medical, Inc. (“Restore”), we are responding to the letter dated April 7, 2006 (the “Comment Letter”) from Peggy A. Fisher, Assistant Director of the Securities and Exchange Commission (the “Commission”). Concurrently herewith we transmit for filing under the Securities Act of 1933, as amended, Amendment No. 1 to Restore’s Registration Statement on Form S-1 (the “Form S-1”).

     Set forth below are the responses to the Comment Letter provided to us by Restore. For ease of reference, each comment contained in the Comment Letter appears directly above Restore’s corresponding response.

General

1. Please confirm that any preliminary prospectus you circulate will include all non-Rule 430A information. This includes a bona fide estimate of the range of the maximum offering price and the maximum number of securities offered.

     Response: We hereby confirm that any preliminary prospectus that Restore circulates will include all non-Rule 430A information, including a bona fide estimate of the range of the maximum offering price and the maximum number of securities offered.

2. Please provide us with copies of the industry reports you cite throughout your prospectus. Clearly mark the relevant sections that support the data you have included in your prospectus and the page number of your prospectus where such data has been used. Also tell us whether the sources of the cited data have consented to your use of their names and data and whether any of the reports were commissioned by you or prepared specifically for your use.

     Response: Copies of the requested industry reports with the relevant sections marked that support the data included in the prospectus and the page number of the prospectus will be delivered supplementally via Federal Express to the Staff’s attention.

Securities and Exchange Commission
April 14, 2006
Page 2

3. Please provide us with copies of any graphics you intend to use in your prospectus or confirm that you do not intend to use any graphics.

     Response: Copies of the graphics we intend to use in the prospectus will be delivered supplementally via Federal Express to the Staff’s attention.

4. We note that you have created a number of acronyms that you use in various locations throughout the prospectus. If retained, please ensure that their meanings are clear when they are used in sections other than where they are defined or explained.

     Response: We note the Staff’s comment and have reviewed and revised the prospectus where we deemed appropriate to further ensure that the meanings of the acronyms are clear when used.

Prospectus Summary, page 1

5. Please expand your summary section to indicate some of the more significant challenges you face and the amount of your historical net losses.

     Response: We have revised the summary section of the prospectus to include the requested disclosure. Please see page 1 and page 3 of the Form S-1.

Risk Factors, page 6

6. We note from your disclosure in the first paragraph on page 34 that generally your average selling price for international sales averaged approximately 50% of your United States average selling price. Please enhance your risk factor disclosure to indicate, if true, that your gross margins may decline due to increased international sales.

     Response: We have revised the risk factor disclosure as requested to indicate that our gross margins, or total gross profit as a percentage of total net sales, may decline as a result of the difference in average selling price if revenue from international sales of Pillar Systems, as a percentage of total net sales, increases relative to US sales of Pillar Systems. Please see page 7 of the Form S-1.

We depend on a few international third-party distributors..., page 11

7. Please identify the distributor that accounted for 11% of your total sales.

     Response: We have identified the distributor as requested. Please see page 11 of the Form S-1.

Dilution, page 22

8. Expand the last paragraph to quantify the increase in dilution and the change in the preceding table if you assume all outstanding options and warrants are exercised.

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Securities and Exchange Commission
April 14, 2006
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     Response: We have expanded the last paragraph as requested to quantify the increase in dilution and the change in the preceding table if we assume all outstanding options and warrants are exercised. Please see page 23 of the Form S-1.

Selected Financial Data, page 23

9. Please revise the introductory paragraph to indicate the source of the statements of operations data for the years ended December 31, 2001 and 2002 and the balance sheet data as of December 31, 2001, 2002 and 2003.

     Response: We have revised the introductory paragraph as requested to indicate the source of the statements of operations data for the years ended December 31, 2001 and 2002 and the balance sheet data as of December 31, 2001, 2002 and 2003. Please see page 24 of the Form S-1.

Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 26

10. Please revise the last italicized sentences of your introduction to your “Management’s Discussion and Analysis” section to eliminate the implication that you have not described all material risks in your “Risk Factors” section, and revise your risk factors as necessary to include a discussion of all material risks.

     Response: We have revised the introduction to the “Management’s Discussion and Analysis” section of the prospectus as requested to eliminate the implication that we have not described all material risks in the “Risk Factors” section. Please see page 27 of the Form S-1.

Application of Critical Accounting Policies and Use of Estimates, page 28

— Stock-Based Compensation, page 30

11. You state that in the preparation of your consolidated financial statements you engaged an independent valuation firm to assist in determining the fair value of your common stock. As such, disclose the name of the expert and include the consent of the expert. You must provide a written consent under Securities Act Rule 436 as an exhibit to the filing.

     Response: We note the Staff’s comment and have revised the prospectus to clarify that Restore estimated the fair market value of its common stock based upon several factors, which included input from external appraisers. We respectfully believe that Restore did not rely on such external appraisers as experts from whom written consents would be required to be filed under Securities Act Rule 436. Please see page 31 of the Form S-1.

Series C-1 Financing, page 31

12. Please briefly indicate why you are adjusting the conversion price of your Series C and Series C-1 preferred stock.

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Securities and Exchange Commission
April 14, 2006
Page 4

     Response: The stockholders approved an amendment to Restore’s certificate of incorporation to adjust the conversion price of the Series C and Series C-1 preferred stock in consideration for a modification of the definition of a “qualified” initial public offering such that this initial public offering triggers the mandatory conversion of our preferred stock into common stock. We have revised page 32 of the prospectus to describe the reason for the adjustment to the conversion price.

Results of Operations, page 33

13. We note throughout your MD&A discussion that you state that a change is primarily attributable to more than one cause. In those instances, discuss and quantify the impact of all causes on your results of operations. Avoid just listing causes for an increase/decrease in a particular line item on your income statement. For example, for general administrative expenses in 2005, you refer to increased expenses for the hiring of your new CEO, expenses associated with the resignation of your former CEO, recruiting costs, consulting costs and an increase in bad debt expense in describing the change from 2004 to 2005. Similarly, in your discussion of cost of sales and gross margin for 2004, you refer to higher inventory reserves, higher product insurance costs and reduced costs from volume-related production savings. Please revise your MD&A to provide a meaningful discussion of each increase/decrease in your income statement line items along with the related dollar impact for those periods being compared.

     Response: We note the Staff’s comment and have carefully reviewed the MD&A discussion and revised the disclosure where we deemed practicable to quantify the impact of all causes to provide a meaningful discussion of each increase/decrease in our income statement line items. Please see pages 35 through 37 of the Form S-1.

Comparison of Years Ended December 31, 2004 and 2005, page 33

14. Please indicate why you experience the variance indicated between the average selling prices for products sold in the United States versus your international sales.

     Response: The variance between US and international average selling prices is due to the market development investment and distribution costs incurred by the international third-party distributors that Restore would otherwise incur for domestic sales. Additional disclosure has been provided in response to the Staff’s comment. Please see page 35 of the Form S-1.

Research and development expenses, page 35

15. Please briefly indicate why you suspended research and development work on future products in 2004.

     Response: We have revised the description of our research and development expenses to disclose that we suspended research and development work on future products in 2004 to focus on the development, redesign and commercialization of the Pillar delivery system for commercial introduction in 2005.

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April 14, 2006
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The Pillar Procedure..., page 47

16. In the table, add a footnote to explain the entry “In process” in the Pillar column on the “Reimbursement (OSA)” line.

     Response: We note the Staff’s comment and have added a footnote in the table as requested. Restore is actively working with the Center for Medicare and Medicaid Services and private insurance carriers to obtain coverage and coding for the Pillar Procedure to treat mild to moderate OSA. Please see page 48 of the Form S-1.

Government Regulations, page 57

17. Please disclose with greater specificity the international countries in which your products are approved for sale. We note, for example, that you have indicated market potential in China and India but it is not clear whether your products are cleared for sale in those countries. We also note that you have sales into “Asia Pacific” and the “Middle East.” Please tell us which countries you include in these categories.

     Response: We have described with greater specificity the international countries in which our products are approved for sale, as requested. Please see page 60 of the Form S-1.

Management, page 61

18. We note from your disclosure on page 15 that you recently hired a chief financial officer. Please tell us why you have not identified your CFO in your management section.

     Response: Restore’s new Chief Financial Officer has been identified in the management section of the prospectus. Mr. Geyen was hired by Restore in March, but had not begun his full time employment with Restore prior to the initial filing of the Form S-1. Please see page 62 of the Form S-1.

19. Please describe Mr. Foster’s business experience from 2003 until he joined your company in June 2004.

     Response: We have revised the description of Mr. Foster’s business experience to indicate that he was executive director at Hill-Rom, Inc. from 2001 through June 2004, not through 2003 as previously indicated. Please see page 63 of the Form S-1.

20. We note that Messrs. Liszt and Nigon will become directors upon the completion of your offering. Please file the written consents of such persons as required by Rule 438 of the Securities Act.

     Response: We have filed the written consents of Messrs. Liszt and Nigon as required by Rule 438 of the Securities Act. Please see Exhibits 99.1 and 99.2 to the Form S-1.

Principal Stockholders, page 72

21. Please identify the natural persons with voting or investment control over the shares held by Bessemer Venture Partners, State Street Bank & Trust, TH Lee Putnam Investment Trust and General Electric Pension Trust.

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     Response: Bessemer Venture Partners, State Street Bank & Trust, TH Lee Putnam Investment Trust and General Electric Pension Trust are institutional investors, including private investment funds and limited partnerships, with numerous limited partners and/or shareholders. We expect all investment decisions with respect to the registered shares will be made by committees or more than one natural persons who may change from time to time. We respectfully believe identifying natural persons with voting or investment control for these entities would be impractical given the structure of those entities.

Related-Party Transactions, page 75

22. As required by Item 404 of Regulation S-K, please include the monthly service fees paid to Venturi for the use and maintenance of certain equipment referred to in footnote 13 to your financial statements.

     Response: We have included the additional disclosure as requested. Please see page 80 of the Form S-1.

Common Stock, page 79

23. We note the disclosure in your second paragraph that all outstanding shares of your common stock are validly issued, fully paid and nonassessable and that the shares to be issued by you in your offering will be, when issued and paid for, validly issued, fully paid and nonassessable. This disclosure appears to be the opinion of legal counsel. If so, please revise your disclosure to indicate on whose opinion you have relied in making this disclosure and file all required consents.

     Response: We note the Staff’s comment and have revised the prospectus to remove the statement regarding previously issued shares since it was not included based upon the opinion of legal counsel. The validity of the shares of common stock to be issued in this offering will be passed upon by Dorsey & Whitney LLP, and such firm’s consent will be filed with their opinion. Please see page 94 of the Form S-1.

Financial Statements

General

24. As appropriate, please revise to provide updated financial information as required by Rule 3-12 of Regulation S-X.

     Response: We note the Staff’s comment and will revise the Form S-1 as necessary to include updated financial information as required by Rule 3-12 of Regulation S-X.

Report of Independent Registered Accounting Firm, page F-3 and consent

25. Upon consummation of the transaction and prior to the planned effectiveness of the Company’s public offering, please revise your report to remove the explanatory paragraph at the top of the page and to reflect the appropriate report date; ensure the final version is compliant with Article 2 of Regulation S-X. Also, please file a consent with the pre-effective amendment.

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Securities and Exchange Commission
April 14, 2006
Page 7

     Response: We note the Staff’s comment and upon consummation of the transaction and prior to the planned effectiveness of Restore’s public offering, the report will be revised to remove the explanatory paragraph at the top of the page and to reflect the appropriate report date. Furthermore, we will ensure the final version is compliant with Article 2 of Regulation S-X.

Balance Sheets, page F-3

26. Revise to include a pro forma balance sheet (excluding effect of offering proceeds) along the side of the historical balance sheet to give effect to the conversion of your preferred stock that will occur in conjunction with the offering. Also, include a footnote to describe the basis of presentation of the pro forma balance sheet.

     Response: We have revised the prospectus as requested to include a pro forma balance sheet (excluding effect of offering proceeds) along the side of the historical balance sheet to give effect to the conversion of our preferred stock that will occur in conjunction with the offering. Please see page F-3 of the Form S-1. We have also included a footnote to describe the basis of presentation of the pro forma balance sheet. Please see page F-7 of the Form S-1.

Note 1 — Summary of Significant Accounting Policies, page F-7

— (v) Recently Issued Accounting Statements, page F-14

27. Based on your current disclosures here and MD&A, we note that you are adopting SFAS 123(R) on January 1, 2006 using the modified prospective method. As stated in paragraph 72 and 83 of SFAS 123(R), nonpublic entities that used the minimum value method in Statement 123 for either recognition or pro forma disclosures are required to apply the prospective transition method. Please revise or advise us.

     Response: We have revised the prospectus to clarify that Restore is applying the prospective transition method. Please see pages 40 and
F-15 of the Form S-1.

Note 2 — Restatement of Financial Instruments, page F-15

Restated Statement of Cash Flows for the Year Ended December 31, 2003, page F-22

28. We note that you present a total adjustment to ‘non-cash interest expense’ of $2,103,266 and reference this adjustment to items (a) and (b). It appears that the adjustments you reference does not entirely account for the total amount of the adjustment. Please revise and tell us about the adjustments that were made by you other than those currently referenced.

     Response: The disclosure regarding the adjustments to “non-cash interest expense” has been revised to account for the total amount of the adjustment. Please see pages F-18 and F-22 of the Form S-1.

Note 7 — Income Taxes, page F-26

29. Please confirm to us that the detail of the deferred tax assets shown on page F-27 for 2003 and 2004 are restated. If so, please revise to clearly label such information as restated. If not, please tell us how you considered the impact of the restatement adjustments disclosed in Note 2 on your deferred tax assets.

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Securities and Exchange Commission
April 14, 2006
Page 8

     Response: We hereby confirm that the detail of the deferred tax assets shown on page F-27 for 2003 and 2004 are restated, and we have revised the prospectus to clearly label such information as restated. Please see page F-27 of the Form S-1.

Note 10 — Stock Options, page F-33

30. Provide the estimated IPO price or range when available- If the difference between the IPO price and the fair value used to value stock, options or warrants granted during the 12 months prior to the date of the most recent balance sheet is significant please provide us with details of the significant factors contributing to the difference. Please note that we will defer our final evaluation of stock compensation and other costs recognized until you provide the offering price. We may have further comments in this regard when the amendment containing that information is filed.

     Response: We note the Staff’s comment and will provide the requested disclosure when the IPO price or range becomes available.

Note 11 — Debt Financing Arrangement and Warrant Issuances, page F-34

— 2003 Bridge Notes, page F-35

31. We note in June 2003 you issued convertible notes that were convertible into the next defined round of equity financing at a 25% discount from the fair market price. In regards to your accounting for these convertible notes please tell us and revise to clarify the following:

• In connection with the original terms of the financing, the notes provided for conversion into equity. At the time of the issuance of the notes and based on its original terms, tell us how you considered the guidance in SFAS 133 Implementation Issue B16 and paragraphs 12 and 13 of SFAS 133 in accounting for the conversion terms. It appears that the debt instrument contained an embedded put option and the value of the equity financing due to the holders of these notes provided for a higher rate of return on the debt.

• Clarify to us what you mean by “the contingent beneficial conversion feature was eliminated.”

• We note your disclosure that 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. Please tell us why you believed it was appropriate to record a gain on the conversion as oppose to reflecting the value of the bifurcated embedded feature (fair value of the pat option liability) on conversion as part of the basis of the preferred stock.

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Securities and Exchange Commission
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• We note that the features of your 2002 Bridge Notes were similar to the 2003 Bridge Notes. In this regard, please apply this comment to the accounting for the 2002 Bridge Notes.

     Response: In connection with the 2003 Notes conversion feature, Restore reviewed the applicability of paragraphs 12 (a) to 12 (c) and 6 to 11 of SFAS No 133 to determine whether the conversion option is required to be bifurcated from the debt host. In accordance with paragraph 12 (c), we analyzed paragraph 6 of SFAS 133 to evaluate whether or not a separate instrument with the same terms of the conversion option would be a derivative instrument. We concluded that the conversion option does not meet the definition of a derivative (and therefore does not require bifurcation under paragraph 12 of SFAS 133) as it does not have the characteristics described in paragraph 6a and 6c of SFAS 133. The equity into which the debt is convertible is not defined and does not yet exist, and therefore, we believe that an underlying does not exist. Further, the conversion option does not meet the net settlement characteristics since the equity into which the debt is convertible is not yet defined and Restore’s equity securities are not publicly traded, and therefore the criteria in paragraph 9 of SFAS would not be met. As such, the conversion feature does not meet the definition of a derivative per paragraphs 6(a) and 7 of SFAS No. 133. As there is not an embedded put associated with the conversion feature, DIG Issue B16 and paragraph 13 is not applicable.

     The disclosure in Note 11 has been revised to clarify that the December 9, 2003 modification to the 2003 Notes resulted in the removal of the 25% discount to the conversion price to the next round of financing.

     The disclosure in Note 11 has been revised to clarify that during 2004 the embedded put was marked to estimated fair value prior to the conversion of the 2003 Notes to Series C-1 preferred stock. The embedded put had no remaining fair value prior to the conversion of the 2003 Notes to Series C-1 preferred stock.

     The terms of the 2003 Notes were similar to the 2002 Bridge Note. We have addressed the applicable Staff comments related to the 2002 Bridge Notes as follows:

• In connection with the 2002 Note conversion feature, Restore reviewed the applicability of paragraphs 12 (a) to 12 (c) and 6 to 11 of SFAS No 133. The 2002 Note did not contain a net settlement feature for any underlying other than the principal and interest on the note. The amount of this settlement is the notional amount. The equity underlying is not defined and is contingent upon future financing, therefore, until the financing occurs, which results in an automatic conversion to equity, there cannot be a net settlement feature for any equity underlying. As such, the conversion feature does not meet the definition of a derivative per paragraphs 6(a) and 7 of SFAS No. 133. As there is not an embedded put associated with the conversion feature, DIG Issue B16 is not applicable.

• The disclosure in Note 11 has been revised to clarify the December 9, 2003 modification to the 2002 Note resulted in the removal of the 25% discount to the conversion price to the next round of financing.

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Note 17 — Subsequent Events, page F-39

32. Please confirm our understanding that the 1-for-2 reverse stock split of all of your issued and outstanding common stock will occur before the effectiveness of your registration statement.

     Response: We hereby confirm your understanding that the 1-for-2 reverse stock split of Restore’s issued and outstanding common stock will occur before the effectiveness of the registration statement.

Part II

Item 13. Other Expenses of Issuance and Distribution, page II-1

33. Please include as a separate item any premium paid on any policy obtained in connection with your offering which insures or indemnifies directors or officers against any liabilities they may incur in connection with the registration, offering or sale of your securities. Refer to Instruction to Item 511 of Regulation S-K.

     Response: Additional insurance premiums have not been paid with respect to Restore’s existing director and officer liability insurance in connection with the offering. If a new insurance policy is obtained by Restore in connection with the offering which insures or indemnifies directors or officers against any liabilities they may incur in connection with the registration, offering or sale of Restore’s securities, the premium paid will be disclosed as a separate item as requested.

Item 16. Exhibits, page II-4

34. Please file the 2002 and 2003 bridge loan agreements and notes as exhibits to your registration statement.

     Response: We have filed the 2002 bridge note, the 2003 bridge loan agreement and the forms of the promissory notes and warrants issued pursuant to the 2003 bridge loan agreement as exhibits to the Form S-1 as requested. Please see Exhibits 10.19-10.22 to the Form S-1.

Item 17. Undertakings, page II-5

35. Please include the undertakings in Item 512(a)(5)(ii) and 512(a)(6) of Regulation S-K.

     Response: We have revised the Form S-1 to include the undertakings. Please see page II-6 of the Form S-1.

* * * * *

     As always, should you have further comments or require further information, or if any questions should arise in connection with this submission, please call me at (612) 340-2946 if we can expedite your review in any way, or fax me at (612) 340-8738.

Very Truly Yours,

/s/ Robert A. Kuhns

cc: J. Robert Paulson, Jr.
Kenneth L. Cutler
Mark C. Smith
Andrew D. LaFrence

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