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UNITED STATES SECURITIES AND
    EXCHANGE COMMISSIONWashington, D.C.
    20549
      Form 10-K
      þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2007o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)  OF
    THE SECURITIES EXCHANGE ACT OF 1934   Commission file number
    000-51998
      Restore Medical,
    Inc.
 (Exact name of registrant as
    specified in its charter)
      Delaware

41-1955715(State or other jurisdiction
    of
    incorporation or organization)

(I.R.S. Employer
    Identification No.)  2800 Patton Road
 St. Paul, Minnesota 55113
 (651) 634-3111
 (Address and zip code of
    principal executive offices and registrants telephone
    number, including area code)
  Securities Registered pursuant to Section 12(b) of the
    Act:
  Common Stock, $0.01 par value

Nasdaq Global Market(Title of each class)

(Name of each exchange on which
    registered)   Securities Registered pursuant to Section 12(g) of the
    Act:
 None
      o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  12b-2
  Large accelerated
    filer o

Accelerated
    filer o

Non-accelerated
    filer þ
    (Do not check if a smaller reporting company)

Smaller reporting
    company o   Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE
  Form 10-K.




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##### 





Restore
    Medical, Inc.Form 10-K
    Table of Contents
  PagePART IItem 1.


Business


2Item 1A.


Risk Factors


18Item 1B.


Unresolved Staff Comments


28Item 2.


Properties


28Item 3.


Legal Proceedings


28Item 4.


Submission of Matters to a Vote of Security
    Holders


28PART IIItem 5.


Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities


28Item 6.


Selected Financial Data


31Item 7.


Managements Discussion and Analysis of
    Financial Condition and Results of Operations


33Item 7A.


Quantitative and Qualitative Disclosures About
    Market Risk


42Item 8.


Financial Statements and Supplementary Data


44Item 9.


Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure


69Item 9A.


Controls and Procedures


69Item 9B.


Other Information


69PART IIIItem 10.


Directors, Executive Officers and Corporate
    Governance


69Item 11.


Executive Compensation


70Item 12.


Security Ownership of Certain Beneficial Owners
    and Management, and Related Stockholder Matters


70Item 13.


Certain Relationships and Related Transactions,
    and Director Independence


70Item 14.


Principal Accountant Fees and Services


70PART IVItem 15.


Exhibits and Financial Statement Schedule


71Signatures


72Exhibit Index


73Consent of KPMG LLP, Independent Registered Public Accounting FirmCertification of Chief Executive Officer pursuant to Section 302Certification of Chief Financial Officer pursuant to Section 302Certification of Chief Executive Officer pursuant to Section 906Certification of Chief Financial Officer pursuant to Section 906   1




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This Annual Report on
    Form 10-K
    contains certain forward-looking statements within
    the meaning of Section 27A of the Securities Act of 1933,
    as amended, and Section 21E of the Securities Exchange Act
    of 1934, as amended. All statements, other than statements of
    historical facts, are forward-looking statements for
    purposes of these provisions, including any projections of
    earnings, revenue or other financial items, any statement of the
    plans and objectives of management for future operations, any
    statements concerning proposed new product development, any
    statements regarding future economic conditions or performance,
    and any statement of assumptions underlying any of the
    foregoing. In some cases, forward-looking statements can be
    identified by the use of terminology such as may,
    will, expects, plans,
    anticipates, estimates,
    potential, or continue or the negative
    thereof or other comparable terminology. Although we believe
    that the expectations reflected in the forward-looking
    statements contained herein are reasonable, there can be no
    assurance that such expectations or any of the forward-looking
    statements will prove to be correct. Our actual results may
    differ significantly from the results discussed in the
    forward-looking statements. Factors that could cause or
    contribute to such differences include, but are not limited to,
    those discussed below in Item IA Risk Factors
    and in other documents we file from time to time with the
    Securities and Exchange Commission, including our Quarterly
    Reports on
    Form 10-Q.
    Restore Medical, Inc. disclaims any intention or obligation to
    update or revise any forward-looking statements. Unless the
    context requires otherwise, references to we,
    us, our and Restore refer to
    Restore Medical, Inc.
 PART I  Item 1.
    BUSINESS  Overview
  ®
     2




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(651) 634-3111. www.restoremedical.com
  Industry
    Background
  Obstructive
    Sleep Apnea
         3




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Mechanical
    Therapies
    and/or
  Surgical
    Procedures
   4




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Uvulopalatopharyngoplasty,
  Laser-assisted uvulopalatoplasty,
  Radiofrequency ablation, and/or and/or
 5




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Snoring
          Sclerotherapy
    Our
    Solution  The Pillar Procedure
   6




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
    Clinically effective, long-lasting
    treatment.  In multiple clinical studies, the
    Pillar Procedure has demonstrated comparable or superior
    clinical outcomes compared to more invasive palatal surgical
    procedures that involve the permanent removal or destruction of
    tissue. Our procedure has demonstrated sustained clinical
    benefits over time, as compared to the clinical benefits of
    surgical procedures that ablate and destroy palatal tissue,
    which often diminish over time as scar tissue tends to remodel,
    reabsorb 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 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 CPAP users with mild to moderate OSA who
    are unable or unwilling to comply with their CPAP therapy, the
    Pillar Procedure offers a minimally invasive procedural
    alternative to treat the soft palate component of OSA, and one
    that can be done in combination with interventional procedures
    or devices designed to treat other areas of anatomical upper
    airway obstruction that can cause or contribute to OSA.
    Uses local anesthetic, not general
    anesthesia.  Physicians use only topical and local
    anesthetics to perform the Pillar Procedure, rather than the
    general anesthesia that usually is required for more invasive
    surgical procedures, resulting in fewer complications and a
    significantly shorter recovery period for the patient.
    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 typically resume their normal diet and
    activities the same day without the need for an overnight
    hospital stay or prescription pain relievers. Invasive surgical
    procedures often entail a recovery period of up to two weeks and
    prescription narcotics to manage the pain. Other surgical
    procedures that scar or ablate palatal tissue usually require
    multiple treatments involving repeat visits to the physician. 7




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
    Economic benefits to patients, physicians and third party
    healthcare insurers.  For patients, the Pillar
    Procedure is a relatively low-cost, one-time treatment solution
    with no recurring expenses. For physicians, the Pillar Procedure
    is a simple, easy-to-learn, minimally invasive, in-office
    procedure with clinical proven and sustained benefits for
    patients suffering from mild to moderate OSA and chronic
    snoring. The Pillar Procedure can be a profitable in-office
    procedure for physicians, and can offer a cost-effective
    alternative to more invasive and risky procedures with higher
    complication rates or procedures which have not demonstrated
    long-term clinical benefits. For patients and health care
    insurers, the Pillar Procedure offers clinically effective and
    sustained outcomes with minimal complications, and a
    cost-effective approach to treat the soft palate component of
    snoring and OSA.    Our
    Strategy
    
    Work closely with our key customers who are committed to growing
    their sleep practices and help them to implement sleep practice
    support programs and initiatives that help increase the number
    of patients they treat for obstructive sleep breathing disorders;
    Work with our key physician customers to establish effective
    referral relationships with a variety of primary care providers,
    sleep centers, and sleep dentists to effectively diagnose and
    treat patients who are suffering from chronic snoring or who are
    unable or unwilling to comply with CPAP therapy, and are seeking
    safe and clinically effective alternatives to CPAP therapy for
    reasons of lifestyle, quality of life, and convenience;
    Continue to collaborate with health care providers and insurers
    around the country to establish adequate and appropriate
    third-party healthcare insurance coverage and reimbursement for
    use of the Pillar Procedure to treat mild to moderate OSA;
    Sponsor and participate in additional clinical studies to
    (i) further validate the clinical effectiveness of the
    Pillar Procedure for the treatment of snoring and mild to
    moderate OSA, either stand-alone or in combination with other
    therapies or procedures to treat the multi-level upper airway
    obstruction that cause OSA and snoring, and (ii) to
    evaluate the clinical effectiveness of Pillar inserts for other
    indications, including the treatment of nasal
    obstruction; and
    Proactively explore the development of new technologies, devices
    and products to effectively diagnose
    and/or treat
    areas of upper airway obstruction beyond the soft palate.  Sales and
    Marketing
  U.S.
    Sales and Marketing Strategies
   8




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International
    Sales Strategy
  and/or
  Clinical
    Studies
    Obstructive
    Sleep Apnea
   9




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90-days 3 £
    Snoring
  follow-up
  Additional
    Clinical Studies
  and/or
 10




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Third-Party
    Reimbursement
  third-party
  third-party
        country-by-country and/or
 11




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Research
    and Development
      Intellectual
    Property
        Manufacturing
    Competition
   12




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development-stage
    Government
    Regulations
  United
    States
      The FDAs Premarket Clearance and Approval
    Requirements.
  510(k) Clearance Pathway.
 13




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Premarket Approval (PMA) Pathway.
         14




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International
      Product
    Liability and Insurance
    Employees
      Seasonality
   15




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Executive
    Officers of Restore
    Name

Age


PositionJ. Robert Paulson, Jr.


51


President, Chief Executive Officer and DirectorChristopher R. Geyen


37


Senior Vice President and Chief Financial OfficerCraig G. Palmer


58


Senior Vice President of U.S. SalesDavid L. Bremseth, Pharm. D.


48


Vice President of Clinical AffairsPaul J. Buscemi, Ph.D.


61


Vice President of Research and DevelopmentMichael R. Kujak


43


Vice President of MarketingPhilip E. Radichel


64


Vice President of Information SystemsJohn P. Sopp


44


Vice President of Operations   J. Robert Paulson, Jr.
  Christopher R. Geyen
  Craig G. Palmer
  David L. Bremseth, Pharm.D.,
 16




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Paul J. Buscemi, Ph.D.,
  Michael R. Kujak
  Philip E. Radichel
  John P. Sopp
  Our
    Corporate Information
  (651) 634-3111. Form 10-K, Form 10-Q Form 8-K www.restoremedical.com www.sec.gov Form 10-K.
  ® Form 10-K
 17




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Item 1A.
    RISK
    FACTORS  Our business, financial condition or results of operations
    could be materially adversely affected by any of the risks and
    uncertainties described below. Additional risks not presently
    known to us, or that we currently deem immaterial, may also
    impair our business, financial condition or results of
    operations. You should consider carefully the risks and
    uncertainties described below and all the other information
    contained in this Annual Report on
    Form 10-K,
    including our financial statements and related notes. The market
    price of our common stock could decline due to any of these
    risks and uncertainties.
  Risks
    Relating to Our Business and Industry
  We
    will require additional capital to operate our business, and our
    short-term investments in auction rate securities may prove to
    be illiquid.
           18




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Our
    Independent Registered Public Accounting Firms report on
    our financials statements includes an emphasis paragraph stating
    that there is substantial doubt regarding our ability to
    continue as a going concern.
    A low
    stock price or our inability to comply with other applicable
    requirements could result in our common stock being delisted
    from the NASDAQ Global Market, which could affect its market
    price and liquidity and reduce our ability to raise
    capital.
    We
    will not be successful if our Pillar System is not adopted for
    the treatment of snoring or mild to moderate obstructive sleep
    apnea.
    
    believe that the Pillar Procedure offers meaningful clinical and
    economic benefits as compared to the other therapies, procedures
    or devices, surgical and non-surgical, currently being used to
    treat patients suffering from mild to moderate OSA or snoring; 19




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
    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,
    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.    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.
    
    the demand for and acceptance of our Pillar System to treat mild
    to moderate OSA and snoring by patients, and by physicians or
    other healthcare providers who treat sleep breathing disorders;
    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 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 Pillar System orders from physicians and
    independent distributors;
    our ability in the future to obtain reimbursement for the Pillar
    Procedure to treat mild to moderate OSA 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; 20




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
    seasonal fluctuations in revenue due to the elective nature of
    all elective sleep disordered breathing treatments, including
    the Pillar Procedure; and
    general economic conditions as well as those specific to our
    customers and markets.  We
    expect to derive substantially all of our future sales from a
    single product.
    Further
    clinical studies of our Pillar System may adversely impact our
    ability to generate revenue if the data from these studies 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.
        Our
    business and results of operations may depend upon the ability
    of healthcare providers to achieve adequate levels of
    third-party reimbursement.
     21




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and/or
    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.
    
    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.      Our
    products are currently not recommended by most pulmonologists,
    who currently are integral to the diagnosis and treatment of
    sleep breathing disorders.
   22




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We
    face significant competition in the market for treating sleep
    breathing disorders.
      Our
    Pillar System may become obsolete if we are unable to anticipate
    and adapt to rapidly changing technology.
    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.
    
    the ability of our independent distributors to market and sell
    our Pillar System and train physicians or other healthcare
    providers 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; 23




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
    our ability to identify new reputable and qualified 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
    failure of our largest U.S. customer or international
    third-party distributors to pay for their purchases of Pillar
    Systems on a timely basis could reduce our future net sales and
    negatively impact our liquidity.
  and/or
  We
    depend on our patents and proprietary technology, which we may
    not be able to protect.
     24




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We may
    face intellectual property infringement claims that would be
    costly to resolve.
    We may
    face product liability claims that could result in costly
    litigation and significant liabilities.
    We
    depend on a few suppliers for key components, making us
    vulnerable to supply shortages and price
    fluctuation.
    Our
    sales and marketing efforts may not be successful.
   25




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All of
    our operations are conducted at a single location; therefore,
    any disruption at our existing facility could substantially
    affect our business.
    We
    depend on certain key personnel.
    We
    incur significant increased costs as a result of operating as a
    public company, and our management devotes substantial time to
    new public company compliance requirements.
     26




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Our
    stock price may be volatile and a stockholders investment
    may decline in value.
    
    variations in our quarterly operating results;
    cash balances and available cash resources and the potential
    reduction in the scope of our operations to preserve our cash
    balances
    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;
    licensing of certain of our intellectual property;
    decreases in market valuations of medical device
    companies; and
    fluctuations in stock market prices and volumes.    Future
    sales of our common stock by existing stockholders could cause
    our stock price to decline.
    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.
   27




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Item 1B.
    UNRESOLVED
    STAFF COMMENTS    Item 2.
    PROPERTIES    Item 3.
    LEGAL
    PROCEEDINGS    Item 4.
    SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS   PART II  Item 5.
    MARKET
    FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
    AND ISSUER PURCHASES OF EQUITY  Stock
    Listing
  tm
 28




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Stock
    Prices
    Price
    Range of Common Stock
  High


LowYear ended December 31, 2006:2nd Quarter (commencing May 17, 2006)

$
8.40


$
6.803rd Quarter


7.90



5.804th Quarter


7.05



3.09Year ended December 31, 2007:1st Quarter

$
4.90


$
2.602nd Quarter


3.74



1.623rd Quarter


1.97



0.904th Quarter


1.63



1.02   Dividend
    Policy
    Repurchases
    of Equity Securities
      Recent
    Sales of Unregistered Securities
    Use of
    Proceeds
  Form S-1 No. 333-132368),
 29




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Stock
    Performance Graph
    COMPARISON
    OF 19 MONTH CUMULATIVE TOTAL RETURN* Among
    Restore Medical, Inc, The NASDAQ Composite Index
    And The NASDAQ Medical Equipment Index
  
   *
    $100 invested on 5/17/06 in stock or 4/30/06 in index-including
    reinvestment of dividends. Fiscal year ending December 31. 30




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Item 6.
    SELECTED
    FINANCIAL DATA  Form 10-K. Form 10-K. Form 10-K. Form 10-K.
  2007


2006


2005


2004


2003Statement of operations data for the fiscal years ended December
    31:Net sales

$
4,101


$
5,886


$
4,854


$
945


$
368Cost of sales(1)


1,035



1,695



1,641



791



412Gross margin (loss)


3,066



4,191



3,213



154



(44
)Operating expenses:Research and development(1)


3,277



3,007



1,869



2,282



3,301General and administrative(1)


4,598



4,960



2,938



2,148



2,003Sales and marketing(1)


8,867



10,022



4,981



4,039



2,333Total operating expenses


16,742



17,989



9,788



8,469



7,637Loss from operations


(13,676
)


(13,798
)


(6,575
)


(8,315
)


(7,681
)Other income (expense):Interest income


852



952



132



169



32Interest expense


(689
)


(734
)


(25
)


(426
)


(2,660
)Put option gain














871



639Preferred stock warrant gain (loss)






500



(572
)


128



9Other, net






50



18



19



(18
)Cumulative effect of change in accounting principle


















267Net loss


(13,513
)


(13,030
)


(7,022
)


(7,554
)


(9,412
)Deemed dividend from revision of preferred stock conversion price






(20,799
)










Amortization of beneficial conversion feature of Series A
    and Series B preferred stock














(252
)


(45
)Net loss attributable to common stockholders

$
(13,513
)

$
(33,829
)

$
(7,022
)

$
(7,806
)

$
(9,457
) 31




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2007


2006


2005


2004


2003Basic and diluted net loss per common share before deemed
    dividend from revision of preferred stock conversion price and
    amortization of beneficial coversion feature of Series A
    and Series B preferred stock

$
(0.84
)

$
(1.26
)

$
(5.77
)

$
(6.31
)

$
(11.37
)Effect of deemed dividend from revision of preferred stock
    conversion price






(2.00
)










Effect of amortization of beneficial coversion feature of
    Series A and Series B preferred stock














(0.21
)


(0.05
)Basic and diluted net loss per common share

$
(0.84
)

$
(3.26
)

$
(5.77
)

$
(6.52
)

$
(11.42
)Basic and diluted weighted average common shares outstanding


16,066,649



10,377,793



1,217,640



1,196,366



827,819(1) Includes stock-based compensation of:Cost of sales

$
103


$
79


$
19


$
2


$
Research and development


206



148



15



2



General and administrative


1,363



1,415



463



30



Sales and marketing


282



211



62



6



$
1,954


$
1,853


$
559


$
40


$
   2007


2006


2005


2004


2003Balance sheet data as of December 31:Cash and cash equivalents

$
3,964


$
11,377


$
3,397


$
2,258


$
853Working capital (deficit)


7,767



21,660



4,058



8,323



(9,486
)Total assets


12,418



26,765



6,395



9,659



2,260Total current liabilities


4,041



4,320



1,769



974



10,891Total liabilities


4,200



7,197



4,230



1,069



11,115Convertible participating preferred stock










39,208



39,208



14,003Convertible participating preferred stock warrants


















Total stockholders equity (deficit)

$
8,218


$
19,568


$
(37,043
)

$
(30,618
)

$
(22,858
)  32




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Item 7.
    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
    Annual Report on
    Form 10-K.
    Some of the information contained in this discussion and
    analysis or set forth elsewhere in this Annual Report on
    Form 10-K,
    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 in Item 1A of Part I of this report 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 report.
  Overview
        and/or
   33




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Application
    of Critical Accounting Policies and Use of Estimates
      Revenue
    Recognition
       34




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customer-by-customer customer-by-customer
  Allowance
    for Doubtful Accounts
  case-by-case
  Warranties
   35




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Accounting
    for Income Taxes
    Stock-Based
    Compensation
  Share-Based Payment
        Results
    of Operations
  Comparison
    of the years ended December 31, 2007 and 2006
  Net Sales.
 36




---



##### Table of Contents



Cost of sales and gross margin.
  Research and development expenses.
  General and administrative expenses.
  Sales and marketing expenses.
 37




---



##### Table of Contents



Interest income.
  Interest expense.
  Preferred stock warrant gain/loss.
  Deemed dividend from revision of preferred stock conversion
    price.
  Comparison
    of Years Ended December 31, 2006 and 2005
  Net Sales.
      Cost of sales and gross margin.
 38




---



##### Table of Contents



Research and development expenses.
  General and administrative expenses.
  Sales and marketing expenses.
  Interest income.
  Interest expense.
  Preferred stock warrant gain/loss.
  Deemed dividend from revision of preferred stock conversion
    price.
  Liquidity
    and Capital Resources
   39




---



##### Table of Contents



40




---



##### Table of Contents



Disclosures
    about Contractual Obligations and Commercial
    Commitments
    Payments Due by PeriodLess Than








AfterContractual Obligations

Total


1 Year


2-3 Years


4-5 Years


5 Years(In thousands)Term debt facility

$
2,802


$
2,802


$



$



$
Capital lease obligations


184



41



89



54



Operating leases


949



276



673







Deposit payable


5



5











Total contractual cash obligations

$
3,940


$
3,124


$
762


$
54


$
     Off-Balance-Sheet
    Arrangements
  Regulation S-K.
  Recent
    Accounting Pronouncements
  Accounting for
    Uncertainty in Income Taxes, an interpretation of FASB Statement
    No. 109
 41




---



##### Table of Contents



Fair
    Value Measurements
  Managements
    Report on Internal Control over Financial Reporting
  Rules 13a-15(f) 15d-15(f)
  
    pertain to the maintenance of records that, in reasonable
    detail, accurately and fairly reflect the transactions and
    dispositions of the assets of the company;
    provide reasonable assurance that transactions are recorded as
    necessary to permit preparation of financial statements in
    accordance with generally accepted accounting principles, and
    that receipts and expenditures of the company are being made
    only in accordance with authorizations of management and
    directors of the company; and
    provide reasonable assurance regarding prevention or timely
    detection of unauthorized acquisition, use or disposition of the
    companys assets that could have a material effect on the
    financial statements.        Item 7A.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  Interest
    Rate Risk
    Foreign
    Currency Exchange Risk
   42




---



##### Table of Contents



non-United
  Auction
    Rate Securities
   43




---



##### Table of Contents



Item 8.
    FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA  PageReport of Independent Registered Public Accounting Firm


45Balance Sheets as of December 31, 2007 and 2006


46Statements of Operations for the years ended December 31,
    2007, 2006 and 2005


47Statements of Stockholders Equity (Deficit) for the years
    ended December 31, 2007, 2006 and 2005


48Statements of Cash Flows for the years ended December 31,
    2007, 2006 and 2005


49Notes to Financial Statements


50  44




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm               
    45




---



##### Table of Contents



RESTORE
    MEDICAL, INC.
  Balance
    Sheets
 (In thousands, except share amounts)
  December 31,


December 31,2007


2006ASSETSCurrent assets:Cash and cash equivalents

$
3,964


$
11,377Short-term investments


6,285



12,463Accounts receivable, net of allowance for doubtful accounts of
    $21 and $86, respectively


604



1,262Related-party receivables


16



33Inventories


785



598Prepaid expenses


141



237Other current assets


13



10Total current assets


11,808



25,980Machinery and equipment, net


487



539Deferred debt issuance costs, net of accumulated amortization of
    $251 and $128, respectively


123



246Total assets

$
12,418


$
26,765LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
275


$
670Accrued expenses


344



939Accrued payroll and related expense


616



519Current portion of long-term debt, net of debt discount of $37
    and $37, respectively


2,806



2,192Total current liabilities


4,041



4,320Long-term debt, net of debt discount of $0 and $37, respectively


143



2,863Other long-term liabilities


16



14Total liabilities


4,200



7,197Commitments and contingencies (note 12)Stockholders equity:Common stock $0.01 par value: 50,000,000 shares
    authorized; issued and outstanding 15,731,094 and
    15,534,244 shares, respectively


157



155Additional paid-in capital


94,228



92,772Deferred stock-based compensation


(690
)


(1,395
)Accumulated deficit


(85,477
)


(71,964
)Total stockholders equity


8,218



19,568Total liabilities and stockholders equity

$
12,418


$
26,765    46




---



##### Table of Contents



RESTORE
    MEDICAL, INC.
  Statements
    of Operations
 (In thousands, except share and per share amounts)
  Year Ended December 31,2007


2006


2005Net sales

$
4,101


$
5,886


$
4,854Cost of sales(1)


1,035



1,695



1,641Gross margin


3,066



4,191



3,213Operating expenses:Research and development(1)


3,277



3,007



1,869General and administrative(1)


4,598



4,960



2,938Sales and marketing(1)


8,867



10,022



4,981Total operating expenses


16,742



17,989



9,788Loss from operations


(13,676
)


(13,798
)


(6,575
)Other income (expense):Interest income


852



952



132Interest expense


(689
)


(734
)


(25
)Preferred stock warrant gain (loss)






500



(572
)Other, net






50



18Total other income (expense)


163



768



(447
)Net loss


(13,513
)


(13,030
)


(7,022
)Deemed dividend from revision of preferred stock conversion
    price (note 8)






(20,799
)


Net loss attributable to common stockholders

$
(13,513
)

$
(33,829
)

$
(7,022
)Basic and diluted net loss per common share before deemed
    dividend from revision of preferred stock conversion price

$
(0.84
)

$
(1.26
)

$
(5.77
)Effect of deemed dividend from revision of preferred stock
    conversion price






(2.00
)


Basic and diluted net loss per common share

$
(0.84
)

$
(3.26
)

$
(5.77
)Basic and diluted weighted average common shares outstanding


16,066,649



10,377,793



1,217,640(1) Includes stock-based compensation of:Cost of sales

$
103


$
79


$
19Research and development


206



148



15General and administrative


1,363



1,415



463Sales and marketing


282



211



62$
1,954


$
1,853


$
559    47




---



##### Table of Contents



RESTORE
    MEDICAL, INC.
  Statements
    of Stockholders Equity (Deficit)
 (In thousands, except share amounts)
  Additional


Deferred





TotalCommon Stock


Paid-In


Stock-Based


Accumulated


StockholdersShares


Amount


Capital


Compensation


Deficit


Equity (Deficit)Balance, December 31, 2004


821,712


$
8


$
653


$
(166
)

$
(31,113
)

$
(30,618
)Stock options exercised


33,964



1



37











38Changes to deferred compensation










2,498



(1,939
)






559Net loss


















(7,022
)


(7,022
)Balance, December 31, 2005


855,676



9



3,188



(2,105
)


(38,135
)


(37,043
)Issuance of shares in initial public offering, net of offering
    costs


4,000,000



40



27,641











27,681Conversion of participating convertible preferred stock to
    common stock


10,395,288



104



39,104











39,208Conversion of preferred warrants to common stock warrants










648











648Stock options exercised


231,607



2



249











251Stock warrants exercised


51,673



















Changes to deferred compensation










(98
)


710







612Stock-based compensation under 123(R)










1,241











1,241Deemed dividend from revision of preferred stock conversion price










20,799







(20,799
)


Net loss


















(13,030
)


(13,030
)Balance, December 31, 2006


15,534,244



155



92,772



(1,395
)


(71,964
)


19,568Stock options exercised


189,933



2



207











209Stock warrants exercised


6,917



















Changes to deferred compensation










(188
)


705







517Stock-based compensation under 123(R)










1,437











1,437Net loss


















(13,513
)


(13,513
)Balance, December 31, 2007


15,731,094


$
157


$
94,228


$
(690
)

$
(85,477
)

$
8,218    48




---



##### Table of Contents



RESTORE
    MEDICAL, INC.
  Statements
    of Cash Flows
 (In thousands)
  Year Ended December 31,2007


2006


2005Cash flows from operating activities:Net loss

$
(13,513
)

$
(13,030
)

$
(7,022
)Adjustments to reconcile net loss to net cash used in operating
    activities:Depreciation and amortization


232



193



169Stock-based compensation


1,954



1,853



559Preferred stock warrant (gain) loss






(500
)


572Bad debt expense


92



97



62Non-cash interest expense


160



141



22Change in operating assets and liabilities:Trade receivables


566



(119
)


(1,028
)Related-party receivables


17



(5
)


46Inventories


(187
)


146



(328
)Prepaid expenses


96



(121
)


(20
)Other current assets


(3
)


44



(50
)Accounts payable


(395
)


557



5Accrued expenses


(595
)


294



175Accrued payroll and related expenses


97



(154
)


276Other long-term liabilities


2



7



7Net cash used in operating activities


(11,477
)


(10,597
)


(6,555
)Cash flows from investing activities:Maturities of short-term investments


36,037



36,979



13,212Purchase of short-term investments


(29,859
)


(49,194
)


(7,286
)Purchases of machinery and equipment


(92
)


(190
)


(208
)Net cash provided by (used in) investing activities


6,086



(12,405
)


5,718Cash flows from financing activities:Proceeds from issuance of long-term debt






4,000



2,000Increase in deferred offering costs










(61
)Repayments on long-term debt


(2,202
)


(997
)


Capital lease payments


(29
)


(14
)


(1
)Proceeds from stock options exercised


209



251



38Net proceeds from initial public offering






27,681



Other






61



Net cash (used in) provided by financing activities


(2,022
)


30,982



1,976Net (decrease) increase in cash and cash equivalents


(7,413
)


7,980



1,139Cash and cash equivalents:Beginning of year


11,377



3,397



2,258End of year

$
3,964


$
11,377


$
3,397Supplemental disclosure:Interest paid

$
529


$
593


$
4Non-cash investing and financing activities:Value of preferred stock warrants issued with long-term debt

$



$
273


$
169Capital lease financing


88



116



25Deemed dividend on revision of preferred stock conversion price






20,799



Conversion of Series A through C-1 preferred stock to
    common stock






39,208



Conversion of preferred stock warrants to common stock warrants






648



    49




---



##### Table of Contents



RESTORE
    MEDICAL, INC.
  Notes
    to Financial Statements
 (In
    thousands, except share and per share amounts)
  (1)
    Organization
    and Summary of Significant Accounting Policies  Nature of Business  ®
  Use of Estimates 
  Cash and Cash Equivalents 
  Short-term investments EITF 03-1 FAS 115-1 124-1, The Meaning of Other-Than-Temporary Impairment and Its
    Application to Certain Investments,
  2007


2006Held-to-maturity: Corporate debt securities

$
2,085


$
12,463Available-for-sale: Auction rate securities


4,200



$
6,285


$
12,463  50




---



##### Table of Contents



RESTORE
    MEDICAL, INC.
  Notes to
    Financial Statements  (Continued)
 (In
    thousands, except share and per share amounts)
  Fair Value of Financial Instruments 
  Short-term investments
  Long-Term Debt
  Warrants Subject to Redemption
  Inventories  first-in,
  December 31,


December 31,2007


2006Raw materials

$
39


$
57Work in process


437



320Finished goods


309



221$
785


$
598   Machinery and Equipment 
  Impairment of Long-Lived Assets 
  Deferred Debt Issuance Costs 
  Revenue Recognition 
 51




---



##### Table of Contents



RESTORE
    MEDICAL, INC.
  Notes to
    Financial Statements  (Continued)
 (In
    thousands, except share and per share amounts)
        Number of


Percent of TotalCustomers


Net SalesDecember 31, 2007


1



21
%December 31, 2006






0
%December 31, 2005


1



11
%       Number of


Percent of TotalCustomers


Net ReceivablesDecember 31, 2007


1



33
%December 31, 2006


2



26
%     Year Ended December 31,2007


2006


2005United States

$
3,682


$
4,580


$
3,416Asia Pacific


70



570



1,111Europe


236



487



153All other markets


113



249



174$
4,101


$
5,886


$
4,854   Allowance for Doubtful Accounts 
 52




---



##### Table of Contents



RESTORE
    MEDICAL, INC.
  Notes to
    Financial Statements  (Continued)
 (In
    thousands, except share and per share amounts)
    2007


2006


2005Beginning balance

$
86


$
60


$
12Provision


92



97



62Write-offs


(157
)


(71
)


(14
)Ending balance

$
21


$
86


$
60   Warranty Costs 
  2007


2006


2005Beginning balance

$
3


$
5


$
Warranty provision


35



15



17Warranty claims


(26
)


(17
)


(12
)Ending balance

$
12


$
3


$
5     Stock-Based Compensation  Share-Based Payment
   53




---



##### Table of Contents



RESTORE
    MEDICAL, INC.
  Notes to
    Financial Statements  (Continued)
 (In
    thousands, except share and per share amounts)
  Severance 
 2007


2006


2005Beginning balance

$
168


$
173


$
191Expense


365



481



192Payments


(531
)


(486
)


(210
)Ending balance

$
2


$
168


$
173   Research and Development Costs 
  Advertising Expense 
  Foreign Currency Transactions 
  Income Taxes 
  Net Loss per Share 
  Year Ended December 31,2007


2006


2005Net loss attributable to common stockholders

$
(13,513
)

$
(33,829
)

$
(7,022
)Weighted average common shares and equivalents outstanding:Common shares outstanding


15,688,527



9,999,671



839,518Warrants issued at a nominal exercise price


378,122



378,122



378,122Weighted average shares outstanding  basic and diluted


16,066,649



10,377,793



1,217,640Net loss per share  basic and diluted

$
(0.84
)

$
(3.26
)

$
(5.77
)  54




---



##### Table of Contents



RESTORE
    MEDICAL, INC.
  Notes to
    Financial Statements  (Continued)
 (In
    thousands, except share and per share amounts)
  Recently Issued Accounting Statements  Accounting for Uncertainty
    in Income Taxes, an interpretation of FASB Statement
    No. 109
  Fair
    Value Measurements
  (2)
    Going
    Concern       55




---



##### Table of Contents



RESTORE
    MEDICAL, INC.
  Notes to
    Financial Statements  (Continued)
 (In
    thousands, except share and per share amounts)
      (3)
    Machinery
    and Equipment, net    Estimated2007


2006


Useful LivesFurniture and office equipment

$
159


$
95



5 yearsComputer hardware and software


409



390



3 yearsProduction and production support equipment


608



534



5 yearsLeasehold improvements


95



88



4 years1,271



1,107Less accumulated depreciation and amortization


(784
)


(568
)$
487


$
539     (4)
    Accrued
    Expenses    2007


2006Clinical trials

$
50


$
168Legal and accounting


12



188Other


282



583$
344


$
939  56




---



##### Table of Contents



RESTORE
    MEDICAL, INC.
  Notes to
    Financial Statements  (Continued)
 (In
    thousands, except share and per share amounts)
  (5)
    Long-Term
    Debt    2007


2006Term loan (interest at prime plus 3% maturing December 2008),
    net of $37 debt discount at December 31, 2007 and $74 debt
    discount at December 31, 2006

$
2,765


$
4,930Capital lease for equipment (interest at 9.14%, paid balance off
    in September 2007)






18Capital lease for leasehold improvements (interest at 14.33%,
    monthly payments maturing March 2010)


20



27Capital lease for equipment (interest at 12.14%, monthly
    payments maturing July 2011)


66



80Capital lease for equipment (interest at 8.77%, monthly payments
    maturing August 2012)


98



2,949



5,055Less current portion, net of debt discount of $37 at
    December 31, 2007 and $37 at December 31, 2006


(2,806
)


(2,192
)Total long-term debt

$
143


$
2,863     2008

$
2,8432009


462010


432011


382012 and after


16$
2,986       Series C-1
 57




---



##### Table of Contents



RESTORE
    MEDICAL, INC.
  Notes to
    Financial Statements  (Continued)
 (In
    thousands, except share and per share amounts)
  Series C-1
  Series C-1 Series C-1 Series C-1
  Series C-1
  (6)
    Income
    Taxes      Year Ended December 31,2007


2006


2005Computed expected tax benefit


(34.0
)%


(34.0
)%


(34.0
)%State income taxes


(3.2
)


(3.1
)


(1.7
)Change in state tax rate


(0.4
)


(2.0
)


Permanent differences


2.5







3.1Research and development tax credit


(1.0
)


(0.9
)


(0.8
)Other










0.1Change in valuation allowance


36.1



40.0



33.3
%



%



%  58




---



##### Table of Contents



RESTORE
    MEDICAL, INC.
  Notes to
    Financial Statements  (Continued)
 (In
    thousands, except share and per share amounts)
    December 31,2007


2006Deferred tax assets (liabilities):Current:Reserves and accruals

$
98


$
188Start-up
    costs






384Total Current


98



572Non-current:Machinery and equipment


(1
)


(12
)Stock-based compensation


698



326Net operating loss carryforwards


22,327



17,479Research tax credit carryforwards


619



488Total Non-current


23,643



18,281Net gross deferred tax assets


23,741



18,853Valuation allowance


(23,741
)


(18,853
)Net deferred tax assets

$



$
           Accounting for Uncertainty in
    Income Taxes
 59




---



##### Table of Contents



RESTORE
    MEDICAL, INC.
  Notes to
    Financial Statements  (Continued)
 (In
    thousands, except share and per share amounts)
    (7)
    Stockholders
    Equity (Deficit)  1-for-2
    (8)
    Participating
    Convertible Preferred Stock  Series C-1 Series C-1 Series C-1 Series C-1
 60




---



##### Table of Contents



RESTORE
    MEDICAL, INC.
  Notes to
    Financial Statements  (Continued)
 (In
    thousands, except share and per share amounts)
    AmountSeries A, $0.01 par value: 775,000 shares
    authorized and 750,000 shares issued and outstanding

$
747Series B, $0.01 par value: 4,500,000 shares
    authorized and 4,185,411 shares issued and outstanding


13,507Series C, $0.01 par value: 9,500,000 shares
    authorized and 7,615,675 shares issued and outstanding


18,723Series C-1,
    $0.01 par value: 2,940,000 shares authorized and
    2,498,833 shares issued and outstanding


6,231Total convertible participating preferred stock

$
39,208     Series A


Series B


Series C


Series C-1


TotalShares


Amount


Shares


Amount


Shares


Amount


Shares


Amount


Shares


AmountBalance, December 31, 2004


750,000


$
747



4,185,411


$
13,507



7,615,675


$
18,723



2,498,833


$
6,231



15,049,919


$
39,208Balance, December 31, 2005


750,000



747



4,185,411



13,507



7,615,675



18,723



2,498,833



6,231



15,049,919



39,208Conversion to common stock upon initial public offering


(750,000
)


(747
)


(4,185,411
)


(13,507
)


(7,615,675
)


(18,723
)


(2,498,833
)


(6,231
)


(15,049,919
)


(39,208
)Balance, December 31, 2006 and 2007





$







$







$







$







$
   (9)
    Debt
    Financing Arrangement and Warrant Issuances  Series C-1
    Weighted


Preferred


Weighted


Preferred


Weighted


Preferred


WeightedCommon


Average


Series A


Average


Series B


Average


Series C-1


AverageWarrants


Price


Warrants


Price


Warrants


Price


Warrants


PriceBalance as of:December 31, 2004


433,522


$
0.16



9,191


$
1.00



1,827


$
3.00



238,545


$
2.62Granted


























95,420



2.62December 31, 2005


433,522



0.16



9,191



1.00



1,827



3.00



333,965



2.62Granted


























148,854



2.62Converted to common


369,640



3.44



(9,191
)


1.00



(1,827
)


3.00



(482,819
)


2.62Exercised


(61,547
)


0.99























December 31, 2006


741,615



1.72























Exercised


(35,919
)


0.83























December 31, 2007


705,696


$
1.77






$







$







$
  61




---



##### Table of Contents



RESTORE
    MEDICAL, INC.
  Notes to
    Financial Statements  (Continued)
 (In
    thousands, except share and per share amounts)
    (10)
    Preferred
    Stock Warrants Subject to Redemption    (11)
    Stock
    Options         62




---



##### Table of Contents



RESTORE
    MEDICAL, INC.
  Notes to
    Financial Statements  (Continued)
 (In
    thousands, except share and per share amounts)
    Granted to Employees

Granted to Directors2007

2006

2005

2007

2006

2005Volatility

65%

65%

N/A

65%

65%

N/ARisk-free interest rates

4-5%

5.0%

4.0%

5.0%

5.0%

4.0%Expected option life

6.40 years

6.40 years

5 years

5.5 years

5.5 years

5 yearsStock dividend yield

0%

0%

0%

0%

0%

0%    WeightedShares


Shares


Average


Weighted


OptionsAvailable for


Under


Exercise Price


Average Fair


Exercisable atGrant


Options


per Share


Value


Period EndBalance, December 31, 2004


(20,577
)


886,364


$
1.08







300,878Authorized


1,000,000



Granted


(584,700
)


584,700



1.10


$
5.18Exercised






(33,967
)


1.10Cancelled


31,483



(31,483
)


1.10Balance, December 31, 2005


426,206



1,405,614



1.09







615,918Authorized


1,387,500



Granted


(1,380,200
)


1,380,200



6.89


$
3.95Exercised






(231,607
)


1.08Cancelled


154,901



(154,901
)


5.11Balance, December 31, 2006


588,407



2,399,306



4.17







709,038Granted


(2,191,820
)


2,191,820



2.37


$
3.59Exercised






(189,933
)


1.10Forfeited


395,604



(395,604
)


4.83Cancelled


1,464,800



(1,464,800
)


5.43Balance, December 31, 2007


256,991



2,540,789


$
2.02







924,790    WeightedOutstanding


Vested and Exercisable


AverageWeighted








Weighted


RemainingAggregate


Average





Aggregate


Average


ContractualExercise Price

Shares


Intrinsic Value


Exercise Price


Shares


Intrinsic Value


Exercise Price


Life in Years$0.40 - $1.10


826,769






$
1.08



654,352






$
1.08



6.5$1.33 - $2.08


1,432,050







1.64



25,000







1.45



9.6$3.37 - $3.89


88,170







3.72



53,669







3.61



8.9$7.28 - $8.00


193,800







8.00



191,769







8.00



8.42,540,789


$
359


$
2.02



924,790


$
276


$
2.67



8.5     (1)
    
    The aggregate intrinsic value represents the total pre-tax
    intrinsic value, based on the Companys closing stock price
    of $1.50 as of December 31, 2007, which would have been
    received by the option holders had all option holders exercised
    their options as of that date. 63




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##### Table of Contents



RESTORE
    MEDICAL, INC.
  Notes to
    Financial Statements  (Continued)
 (In
    thousands, except share and per share amounts)
     Weighted AverageGrant Date FairShares


ValueNon-vested at January 1, 2007


1,690,268


$
3.85Granted


2,191,820



3.59Vested


(580,503
)


2.59Forfeited


(381,813
)


3.97Cancelled


(1,303,773
)


3.84Non-vested at December 31, 2007


1,615,999


$
3.68      64




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##### Table of Contents



RESTORE
    MEDICAL, INC.
  Notes to
    Financial Statements  (Continued)
 (In
    thousands, except share and per share amounts)
    Fair Value ofCommonOptions


Exercise


Stock onGrant Date

Granted


Price


Grant DateJanuary 1, 2005


49,250


$
1.10


$
1.88January 18, 2005


5,000



1.10



2.36January 25, 2005


5,450



1.10



2.56February 14, 2005


500



1.10



3.10March 21, 2005


2,500



1.10



4.06March 29, 2005


5,000



1.10



4.28April 1, 2005


1,000



1.10



4.38April 11, 2005


408,500



1.10



4.72April 18, 2005


250



1.10



4.98May 2, 2005


500



1.10



5.48May 23, 2005


15,000



1.10



6.22June 6, 2005


500



1.10



6.70June 30, 2005


2,500



1.10



7.56July 11, 2005


5,250



1.10



7.74July 18, 2005


500



1.10



7.86July 21, 2005


10,000



1.10



7.92August 1, 2005


10,500



1.10



8.10September 1, 2005


15,000



1.10



8.64September 6, 2005


10,000



1.10



8.74November 15, 2005


37,500



1.10



10.44584,700


$
1.10


$
5.18     Volatility

67.5%Risk-free interest rates

4.6%Expected option life

90 DaysStock dividend yield

0%    65




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##### Table of Contents



RESTORE
    MEDICAL, INC.
  Notes to
    Financial Statements  (Continued)
 (In
    thousands, except share and per share amounts)
      45-day
      (12)
    Commitments
    and Contingencies  Leases
    office/warehouse
 66




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##### Table of Contents



RESTORE
    MEDICAL, INC.
  Notes to
    Financial Statements  (Continued)
 (In
    thousands, except share and per share amounts)
        Operating


CapitalLeases


Leases2008

$
276


$
582009


384



582010


289



502011






402012






19Total future minimum lease payments


949



225Less amounts representing interest






(41
)Total capital lease obligations





$
184Less noncancelable sublease payments:2008


(104
)Minimum lease payments

$
845   (13)
    Retirement
    Plan    (14)
    Quarterly
    Financial Data (Unaudited)  Year Ended December 31, 2007Q1


Q2


Q3


Q4


TotalNet sales

$
1,124


$
1,036


$
1,153


$
788


$
4,101Gross margin


856



760



884



566



3,066Loss from operations


(4,245
)


(3,544
)


(2,800
)


(3,087
)


(13,676
)Net loss


(4,157
)


(3,492
)


(2,775
)


(3,089
)


(13,513
)Net loss per share

$
(0.26
)

$
(0.22
)

$
(0.17
)

$
(0.19
)

$
(0.84
)   67




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##### Table of Contents



RESTORE
    MEDICAL, INC.
  Notes to
    Financial Statements  (Continued)
 (In
    thousands, except share and per share amounts)
  Year Ended December 31, 2006Q1


Q2


Q3


Q4


TotalNet sales

$
1,752


$
1,810


$
1,218


$
1,106


$
5,886Gross margin


1,162



1,345



987



697



4,191Loss from operations


(2,844
)


(2,822
)


(3,879
)


(4,253
)


(13,798
)Net loss


(3,054
)


(22,956
)


(3,728
)


(4,091
)


(33,829
)Net loss per share

$
(2.48
)

$
(2.74
)

$
(0.24
)

$
(0.26
)

$
(3.26
)     (15)
    Subsequent
    Events   68




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##### Table of Contents



Item 9.
    CHANGES
    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL DISCLOSURE    Item 9A.
    CONTROLS
    AND PROCEDURES  Evaluation of Disclosure Controls and
    Procedures. Rule 13a-15(e)
  Managements Annual Report on Internal Control Over
    Financial Reporting.
  Changes in Internal Control Over Financial
    Reporting.
  Item 9B.
    OTHER
    INFORMATION   PART III    Item 10.
    DIRECTORS,
    EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE    Regulation S-K
  Form 10-K),
 69




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##### Table of Contents



Item 11.
    EXECUTIVE
    COMPENSATION    Item 12.
    SECURITY
    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
    RELATED STOCKHOLDER MATTERS.      Number of SecuritiesNumber of


Weighted-


Remaining AvailableSecurities to be


Average


for Future IssuanceIssued Upon


Exercise Price


Under EquityExercise of


of Outstanding


Compensation PlansOutstanding


Options,


(Excluding SecuritiesOptions, Warrants


Warrants and


Reflected in SecondPlan Category

and Rights


Rights


Column)Equity compensation plans approved by security holders


3,246,485
(1)

$
1.97



256,991
(2)Equity compensation plans not approved by security holders










Total


3,246,485


$
1.97



256,991     (1)
    
    Consists of options awarded under the 1999 Omnibus Stock Plan
    and outstanding warrants to purchase common stock.(2)
    
    Represents the maximum number of shares of common stock
    available to be awarded as of December 31, 2007.      Item 13.
    CERTAIN
    RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR
    INDEPENDENCE    Item 14.
    PRINCIPAL
    ACCOUNTANT FEES AND SERVICES   70




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##### Table of Contents



PART IV  Item 15.
    EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULE  The following documents are filed as part of this
    Annual Report on
    Form 10-K:
      Exhibits:
   71




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##### Table of Contents



SIGNATURES    Restore Medical, Inc.
  By:
    /s/  J.
    Robert Paulson, Jr.     POWER OF
    ATTORNEY
  Form 10-K
    Signature

Title/s/  J.
    Robert Paulson, Jr.J.
    Robert Paulson, Jr.

President, Chief Executive Officer and Director
    (principal executive officer)/s/  Christopher
    R. GeyenChristopher
    R. Geyen

Chief Financial Officer (principal financial and
    accounting officer)/s/  Mark
    B. Knudson, Ph.D.Mark
    B. Knudson

Chairman and Director/s/  Richard
    NigonRichard
    Nigon

Director/s/  Howard
    LisztHoward
    Liszt

Director/s/  Luke
    Evnin, Ph.D.Luke
    Evnin, Ph.D.

Director/s/  Stephen
    KrausStephen
    Kraus

Director/s/  John
    SchulteJohn
    Schulte

Director  72




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##### Table of Contents



EXHIBIT INDEX  ExhibitNumber

Description3
.1

Second Amended and Restated Certificate of Incorporation of
    Restore Medical, Inc. (Incorporated herein by reference to
    Exhibit 3.2 to Amendment No. 4 to the
    registrants Registration Statement on
    Form S-1
    filed on May 12, 2006 (File
    No. 333-132368)).3
.2

Amended and Restated Bylaws of Restore Medical, Inc.
    (Incorporated herein by reference to Exhibit 3.4 to
    Amendment No. 4 to the registrants Registration
    Statement on
    Form S-1
    filed on May 12, 2006 (File
    No. 333-132368)).4
.1

Investors Rights Agreement, dated as of January 28,
    2004, by and between Restore Medical, Inc. and the parties named
    therein (Incorporated herein by reference to Exhibit 4.2 to
    the registrants Registration Statement on
    Form S-1
    filed on March 13, 2006 (File
    No. 333-132368)).4
.2

First Amendment to Investors Rights Agreement, dated as of
    March 17, 2005, by and between Restore Medical, Inc. and
    the parties named therein (Incorporated herein by reference to
    Exhibit 4.3 to the registrants Registration Statement
    on
    Form S-1
    filed on March 13, 2006 (File
    No. 333-132368)).4
.3

Waiver to Investors Rights Agreement, dated as of
    March 30, 2005, by and between Restore Medical, Inc. and
    the parties named therein (Incorporated herein by reference to
    Exhibit 4.4 to the registrants Registration Statement
    on
    Form S-1
    filed on March 13, 2006 (File
    No. 333-132368)).10
.1

Commercial Lease, dated as of August 5, 2005, by and
    between Roseville Properties Management Company, as agent for
    Commers-Klodt III, and Restore Medical, Inc. (Incorporated
    herein by reference to Exhibit 10.1 to the
    registrants Registration Statement on
    Form S-1
    filed on March 13, 2006 (File
    No. 333-132368)).10
.2

Loan and Security Agreement No. 4541, dated as of
    March 23, 2005, by and between Lighthouse Capital
    Partners V, L.P. and Restore Medical, Inc. (Incorporated
    herein by reference to Exhibit 10.2 to the
    registrants Registration Statement on
    Form S-1
    filed on March 13, 2006 (File
    No. 333-132368)).10
.3

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 Restore Medical,
    Inc., dated March 3, 2006 (Incorporated herein by reference
    to Exhibit 10.2A to the registrants Registration
    Statement on
    Form S-1
    filed on March 13, 2006 (File
    No. 333-132368)).10
.4*

Employment and Change in Control Agreement, dated as of
    April 11, 2005, by and between Restore Medical, Inc. and J.
    Robert Paulson, Jr. (Incorporated herein by reference to
    Exhibit 10.3 to the registrants Registration
    Statement on
    Form S-1
    filed on March 13, 2006 (File
    No. 333-132368)).10
.5*

Employment and Change in Control Supplemental Agreement, dated
    as of March 15, 2006, by and between Restore Medical, Inc.
    and J. Robert Paulson, Jr. (Incorporated herein by reference to
    Exhibit 10.3A to Amendment No. 1 to the
    registrants Registration Statement on
    Form S-1
    filed on April 14, 2006 (File
    No. 333-132368)).10
.6*

Employment and Change in Control Agreement, dated as of
    March 13, 2006, by and between Restore Medical, Inc. and
    Christopher R. Geyen (Incorporated herein by reference to
    Exhibit 10.16 to Amendment No. 1 to the
    registrants Registration Statement on
    Form S-1
    filed on April 14, 2006 (File
    No. 333-132368)).10
.7*

1999 Omnibus Stock Plan, as amended March 2, 2006
    (Incorporated herein by reference to Exhibit 10.7 to
    Amendment No. 4 to the registrants Registration
    Statement on
    Form S-1
    filed on May 12, 2006 (File
    No. 333-132368)).10
.8*

Standard form of Incentive Stock Option Agreement pursuant to
    the 1999 Omnibus Stock Plan (Incorporated herein by reference to
    Exhibit 10.8 to the registrants Registration
    Statement on
    Form S-1
    filed on March 13, 2006 (File
    No. 333-132368)).10
.9*

Standard form of Non-Qualified Stock Option Agreement pursuant
    to the 1999 Omnibus Stock Plan (Incorporated herein by reference
    to Exhibit 10.9 to the registrants Registration
    Statement on
    Form S-1
    filed on March 13, 2006 (File
    No. 333-132368)).10
.10*

Management Incentive Plan (Incorporated herein by reference to
    Exhibit 10.10 to the registrants Registration
    Statement on
    Form S-1
    filed on March 13, 2006 (File
    No. 333-132368)). 73




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##### Table of Contents



ExhibitNumber

Description10
.11*

Executive Compensation Plan (Incorporated herein by reference to
    Exhibit 10.11 to Amendment No. 4 to the
    registrants Registration Statement on
    Form S-1
    filed on May 12, 2006 (File
    No. 333-132368)).10
.12

EU Authorized Representative Contract for Services, dated as of
    June 16, 2003, by and between Quality First International
    and Restore Medical, Inc. (Incorporated herein by reference to
    Exhibit 10.12 to the registrants Registration
    Statement on
    Form S-1
    filed on March 13, 2006 (File
    No. 333-132368)).10
.13

Research and Development Agreement, dated as of August 11,
    2000, by and between Restore Medical, Inc. and Advanced
    Composite Industries, Inc. (Incorporated herein by reference to
    Exhibit 10.14 to the registrants Registration
    Statement on
    Form S-1
    filed on March 13, 2006 (File
    No. 333-132368)).10
.14

Assignment and Grant Back of License Agreement, dated as of
    November 28, 2001, by and between Restore Medical, Inc. and
    Venturi Development Inc. (Incorporated herein by reference to
    Exhibit 10.15 to the registrants Registration
    Statement on
    Form S-1
    filed on March 13, 2006 (File
    No. 333-132368)).10
.15*

Form of Indemnification Agreement entered into by and between
    Restore Medical, Inc. and each of its executive officers and
    directors (Incorporated herein by reference to
    Exhibit 10.23 to Amendment No. 4 to the
    registrants Registration Statement on
    Form S-1
    filed on May 12, 2006 (File
    No. 333-132368)).10
.16*

Form of Principle Executive Officer Employment and Change in
    Control Agreement (Incorporated by reference to
    Exhibit 10.1 to the registrants Current Report on
    Form 8-K
    filed on March 30, 2007).10
.17*

Form of Executive Officer Employment and Change in Control
    Agreement (Incorporated by reference to Exhibit 10.2 to the
    registrants Current Report on
    Form 8-K
    filed on March 30, 2007).14
.1

Code of Conduct and Ethics (Incorporated herein by reference to
    Exhibit 14.1 to the registrants Registration
    Statement on
    Form S-1
    filed on March 13, 2006 (File
    No. 333-132368))23
.1

Consent of KPMG LLP, Independent Registered Public Accounting
    Firm.24
.1

Power of Attorney (included on signature page to this
    Form 10-K).31
.1

Certification of Chief Executive Officer pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.31
.2

Certificate of Chief Financial Officer pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.32
.1

Certification of Chief Executive Officer pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.32
.2

Certification of Chief Financial Officer pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.     *
    
    Management contract or compensatory plan or arrangement. 74