##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, 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, 2006o

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

(I.R.S. Employerincorporation or
    organization)

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




---



##### 



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


Business


2Item 1A.


Risk
    Factors


17Item 1B.


Unresolved Staff
    Comments


26Item 2.


Properties


26Item 3.


Legal
    Proceedings


26Item 4.


Submission of
    Matters to a Vote of Security Holders


26PART IIItem 5.


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


27Item 6.


Selected Financial
    Data


29Item 7.


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


30Item 7A.


Quantitative and
    Qualitative Disclosures About Market Risk


39Item 8.


Financial
    Statements and Supplementary Data


40Item 9.


Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


63Item 9A.


Controls and
    Procedures


63Item 9B.


Other
    Information


63PART IIIItem 10.


Directors,
    Executive Officers and Corporate Governance


63Item 11.


Executive
    Compensation


63Item 12.


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


64Item 13.


Certain
    Relationships and Related Transactions, and Director
    Independence


64Item 14.


Principal
    Accountant Fees and Services


64PART IVItem 15.


Exhibits and
    Financial Statement Schedule


64Signatures


65Exhibit Index


66Consent of KPMG LLP302 Certification of Chief Executive Officer302 Certification of Chief Financial Officer906 Certification of Chief Executive Officer906 Certification of Chief Financail Officer   1




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



Mechanical
    Therapies
    and/or
  Surgical
    Procedures
   4




---



##### Table of Contents



Uvulopalatopharyngoplasty out-of-pocket,
  Laser-assisted uvulopalatoplasty out-of-pocket
  Radiofrequency ablation and/or and/or out-of-pocket
  Snoring
     5




---



##### Table of Contents



over-the-counter
  Sclerotherapy out-of-pocket
  out-of-pocket
  Our
    Solution  The Pillar Procedure
       6




---



##### Table of Contents




    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
    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 and
    suffer from palatal obstruction, the Pillar Procedure offers a
    one-time, permanent treatment alternative that could alleviate
    the nightly burden of wearing an uncomfortable and inconvenient
    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 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 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, 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
    payors, our procedure combines quality outcomes with reasonable
    costs.    Our
    Strategy
   7




---



##### Table of Contents




    increase physician and patient awareness of the Pillar Procedure
    over other treatment options for patients suffering from sleep
    disordered breathing;
    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, and to train physicians and their staff in
    the education and treatment of these patients;
    continue our 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;
    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; and
    proactively explore the development of new products and
    technologies that would allow us to effectively treat other
    areas of upper airway collapse.  Sales and
    Marketing
  U.S. Sales
    and Marketing Strategies
      International
    Sales Strategy
   8




---



##### Table of Contents



Clinical
    Studies
    Obstructive
    Sleep Apnea
    90-days
    Snoring
  follow-up
  Additional
    Clinical Studies
   9




---



##### Table of Contents



follow-up
  mild to
  Third-Party
    Reimbursement
  out-of-pocket out-of-pocket,
       10




---



##### Table of Contents



country-by-country
  Research
    and Development
  ease-of-use
    Intellectual
    Property
       11




---



##### Table of Contents



Manufacturing
    Competition
      Government
    Regulations
  United
    States
      The FDAs Premarket Clearance and Approval
    Requirements
 12




---



##### Table of Contents



510(k) Clearance Pathway
  Premarket Approval (PMA) Pathway
     13




---



##### Table of Contents



International
      Product
    Liability and Insurance
   14




---



##### Table of Contents



Employees
      Seasonality
    Executive
    Officers of Restore
    Name

Age

PositionJ. Robert Paulson, Jr.


50


President, Chief Executive Officer
    and DirectorChristopher R. Geyen


36


Senior Vice President and Chief
    Financial OfficerCraig G. Palmer


57


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


47


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


60


Vice President of Research and
    DevelopmentMichael R. Kujak


42


Vice President of MarketingPhilip E. Radichel


63


Vice President of Information
    SystemsJohn P. Sopp


43


Vice President of Operations   J. Robert Paulson, Jr
  Christopher R. Geyen
  Craig G. Palmer
 15




---



##### Table of Contents



David L. Bremseth
  Paul J. Buscemi
  Michael R. Kujak
  Philip E. Radichel
  John P. Sopp
 16




---



##### Table of Contents



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
  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 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 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.   17




---



##### Table of Contents



We
    expect to derive substantially all of our future sales from a
    single product.
    We
    have incurred losses and we may not be profitable in the
    future.
    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 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 physicians 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; 18




---



##### Table of Contents




    unanticipated delays in the development and introduction of our
    future products
    and/or an
    inability to control costs;
    seasonal fluctuations in revenue due to the elective nature of
    all sleep disordered breathing treatments, including the Pillar
    Procedure; and
    general economic conditions as well as those specific to our
    customers and markets.  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.
        Our
    business and results of operations may depend upon the ability
    of healthcare providers to achieve adequate levels of
    third-party reimbursement.
  out-of-pocket, out-of-pocket.
  and/or
 19




---



##### Table of Contents



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 are integral to the diagnosis and treatment of sleep
    breathing disorders.
    We
    face significant competition in the market for treating sleep
    breathing disorders.
   20




---



##### Table of Contents



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 to perform the Pillar
    Procedure;
    the ability of our independent distributors to sell the quantity
    of Pillar Systems they have committed to purchase from us in
    their respective distribution agreements;
    our ability to identify new 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.   21




---



##### Table of Contents



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.
    The
    failure of large U.S. 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.
  and/or
  We
    depend on our patents and proprietary technology, which we may
    not be able to protect.
     22




---



##### Table of Contents



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.
   23




---



##### Table of Contents



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 net sales.
  on-site out-of-pocket.
  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
    will need to carefully manage our expanding operations to
    achieve sustainable growth.
   24




---



##### Table of Contents



We
    incur significant increased costs as a result of operating as a
    public company, and our management devotes substantial time to
    new compliance requirements.
      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.
  Form 10-K.
  Risks
    Relating to Ownership of Our Common Stock
  Our
    stock price may be volatile and a stockholders investment
    may decline in value.
    
    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. 25




---



##### Table of Contents



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.
    Item 1B.
    UNRESOLVED
    STAFF COMMENTS    Item 2.
    PROPERTIES    Item 3.
    LEGAL
    PROCEEDINGS    Item 4.
    SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS   26




---



##### Table of Contents



PART II  Item 5.
    MARKET
    FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
    AND ISSUER PURCHASES OF EQUITY  Stock
    Listing
  tm
  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



3.09   Dividend
    Policy
    Repurchases
    of Equity Securities
      Recent
    Sales of Unregistered Securities
   27




---



##### Table of Contents



Use of
    Proceeds
  Form S-1 No. 333-132368),
  Stock
    Performance Graph
    COMPARISON
    OF 7 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 on 4/30/06 in
    index-including reinvestment of dividends. Fiscal year ending
    December 31. 28




---



##### Table of Contents



Item 6.
    SELECTED
    FINANCIAL DATA  Form 10-K. Form 10-K. Form 10-K. Form 10-K.
  2006


2005


2004


2003


2002Statement of operations data for
    the fiscal years ended December 31:Net sales

$
5,886


$
4,854


$
945


$
368


$
Cost of sales(1)


1,695



1,641



791



412



Gross margin (loss)


4,191



3,213



154



(44
)


Operating expenses:Research and development(1)


3,007



1,869



2,282



3,301



3,346General and administrative(1)


4,960



2,938



2,148



2,003



1,808Sales and marketing(1)


10,022



4,981



4,039



2,333



229Total operating expenses


17,989



9,788



8,469



7,637



5,383Loss from operations


(13,798
)


(6,575
)


(8,315
)


(7,681
)


(5,383
)Other income (expense):Interest income


952



132



169



32



49Interest expense


(734
)


(25
)


(426
)


(2,660
)


(32
)Put option gain










871



639



Preferred stock warrant gain (loss)


500



(572
)


128



9



Other, net


50



18



19



(18
)


4Cumulative effect of change in
    accounting principle














267



Net loss


(13,030
)


(7,022
)


(7,554
)


(9,412
)


(5,362
)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
)


(951
)Net loss attributable to common
    stockholders

$
(33,829
)

$
(7,022
)

$
(7,806
)

$
(9,457
)

$
(6,313
)Basic 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

$
(1.26
)

$
(5.77
)

$
(6.31
)

$
(11.37
)

$
(7.12
)Effect of deemed dividend from
    revision of preferred stock conversion price


(2.00
)














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










(0.21
)


(0.05
)


(1.27
)Basic and diluted net loss per
    common share

$
(3.26
)

$
(5.77
)

$
(6.52
)

$
(11.42
)

$
(8.39
) 29




---



##### Table of Contents



2006


2005


2004


2003


2002Basic and diluted weighted average
    common shares outstanding


10,377,793



1,217,640



1,196,366



827,819



752,678(1) Includes stock-based
    compensation of:Cost of sales

$
79


$
19


$
2


$



$
Research and development


148



15



2







General and administrative


1,415



463



30







35Sales and marketing


211



62



6







$
1,853


$
559


$
40


$



$
35   2006


2005


2004


2003


2002Balance sheet data as of
    December 31:Cash and cash equivalents

$
11,377


$
3,397


$
2,258


$
853


$
2,182Working capital (deficit)


21,660



4,058



8,323



(9,486
)


1,221Total assets


26,765



6,395



9,659



2,260



3,131Total current liabilities


4,320



1,769



974



10,891



1,284Total liabilities


7,197



4,230



1,069



11,115



2,672Convertible participating
    preferred stock






39,208



39,208



14,003



14,255Convertible participating
    preferred stock warrants


















344Total common stockholders
    equity (deficit)

$
19,568


$
(37,043
)

$
(30,618
)

$
(22,858
)

$
(14,140
)   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
     30




---



##### Table of Contents



out-of-pocket, out-of-pocket.
  and/or
         31




---



##### Table of Contents



Application
    of Critical Accounting Policies and Use of Estimates
      Revenue
    Recognition
          customer-by-customer customer-by-customer
 32




---



##### Table of Contents



Allowance
    for Doubtful Accounts
  case-by-case
  Warranties
    Accounting
    for Income Taxes
    Stock-Based
    Compensation
  Share-Based Payment
     33




---



##### Table of Contents



Results
    of Operations
  Comparison
    of the years ended December 31, 2006 and 2005
  Net Sales.
        Cost of sales and gross margin.
 34




---



##### 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.
  Comparison
    of Years Ended December 31, 2005 and 2004
  Net Sales.
 35




---



##### Table of Contents



Cost of sales and gross margin.
  Research and development expenses.
  General and administrative expenses.
  Sales and marketing expenses.
  Interest income. Series C-1
  Interest expense. Series C-1
  Preferred stock warrant gain/loss.
 36




---



##### Table of Contents



Amortization of beneficial conversion feature of
    Series A and Series B preferred
    stock.
  Liquidity
    and Capital Resources
             37




---



##### 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

$
5,004


$
2,202


$
2,802


$



$
Capital lease obligations


125



27



62



36



Operating leases


1,432



376



768



288



Deposit payable


5







5







Total contractual cash obligations

$
6,566


$
2,605


$
3,637


$
324


$
     Off-Balance-Sheet
    Arrangements
  Regulation S-K.
  Recent
    Accounting Pronouncements
  Share Based Payment Accounting for
    Stock Based Compensation.
    Accounting Changes and Error Corrections  A
    Replacement of APB Opinion No. 20 and FASB Statement
    No. 3 Accounting
    Changes Reporting Accounting Changes in Interim Financial
    Statements
  Accounting for Uncertainty in Income Taxes, an interpretation
    of FASB Statement No. 109
 38




---



##### Table of Contents



Considering the
    Effects on Prior Year Misstatements when Quantifying
    Misstatements in Current Year Financial Statements
  Item 7A.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  Foreign
    Currency Exchange Risk
  non-United
  Interest
    Rate Risk
   39




---



##### Table of Contents



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


41Balance Sheets as
    of December 31, 2006 and 2005


42Statements of
    Operations for the years ended December 31, 2006, 2005 and
    2004


43Statements of
    Stockholders Equity (Deficit) for the years ended
    December 31, 2006, 2005 and 2004


44Statements of Cash
    Flows for the years ended December 31, 2006, 2005 and
    2004


45Notes to Financial
    Statements


46  40




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm           Share-Based Payment, on
   
    41




---



##### Table of Contents



RESTORE
    MEDICAL, INC.
  Balance Sheets
   December 31,


December 31,2006


2005ASSETSCurrent assets:Cash and cash equivalents

$
11,377


$
3,397Short-term investments


12,463



248Accounts receivable, net of
    allowance for doubtful accounts of $86 and $60, respectively


1,262



1,240Related-party receivables


33



28Inventories


598



744Prepaid expenses


237



116Other current assets


10



54Total current assets


25,980



5,827Machinery and equipment, net


539



426Deferred debt issuance costs, net
    of accumulated amortization of $108 and $21, respectively


246



81Deferred offering costs






61Total assets

$
26,765


$
6,395LIABILITIES, CONVERTIBLE
    PARTICIPATING PREFERRED STOCK AND
    STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable

$
670


$
113Accrued expenses


939



645Accrued payroll and related expense


519



673Current portion of long-term debt,
    net of debt discount of $37 and $22, respectively


2,192



338Total current liabilities


4,320



1,769Long-term debt, net of debt
    discount of $37 and $44, respectively


2,863



1,619Other long-term liabilities


14



7Preferred stock warrants subject to
    redemption






835Total liabilities


7,197



4,230Series A through C-1
    convertible participating preferred stock, $0.01 par value;
    none and 17,715,000 authorized, none and 15,049,919 issued and
    outstanding, respectively






39,208



39,208Commitments and contingencies
    (note 11)Stockholders equity (deficit):Common stock $0.01 par value:
    50,000,000 shares authorized; issued and outstanding
    15,534,244 and 855,676 shares, respectively


155



9Additional paid-in capital


92,772



3,188Deferred stock-based compensation


(1,395
)


(2,105
)Accumulated deficit


(71,964
)


(38,135
)Total common stockholders
    equity (deficit)


19,568



(37,043
)Total liabilities, convertible
    participating preferred stock and stockholders equity
    (deficit)

$
26,765


$
6,395    42




---



##### Table of Contents



RESTORE
    MEDICAL, INC.
  Statements of Operations
   Year Ended December 31,2006


2005


2004Net sales

$
5,886


$
4,854


$
945Cost of sales(1)


1,695



1,641



791Gross margin


4,191



3,213



154Operating expenses:Research and development(1)


3,007



1,869



2,282General and administrative(1)


4,960



2,938



2,148Sales and marketing(1)


10,022



4,981



4,039Total operating expenses


17,989



9,788



8,469Loss from operations


(13,798
)


(6,575
)


(8,315
)Other income (expense):Interest income


952



132



169Interest expense


(734
)


(25
)


(426
)Put option gain










871Preferred stock warrant gain (loss)


500



(572
)


128Other, net


50



18



19Total other income (expense)


768



(447
)


761Net loss


(13,030
)


(7,022
)


(7,554
)Deemed dividend from revision of
    preferred stock conversion price (note 7)


(20,799
)






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










(252
)Net loss attributable to common
    stockholders

$
(33,829
)

$
(7,022
)

$
(7,806
)Basic 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

$
(1.26
)

$
(5.77
)

$
(6.31
)Effect of deemed dividend from
    revision of preferred stock conversion price


(2.00
)






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










(0.21
)Basic and diluted net loss per
    common share

$
(3.26
)

$
(5.77
)

$
(6.52
)Basic and diluted weighted average
    common shares outstanding


10,377,793



1,217,640



1,196,366(1) Includes stock-based
    compensation of:Cost of sales

$
79


$
19


$
2Research and development


148



15



2General and administrative


1,415



463



30Sales and marketing


211



62



6$
1,853


$
559


$
40    43




---



##### Table of Contents



RESTORE
    MEDICAL, INC.
  Statements of Stockholders Equity
    (Deficit)
   Additional


Deferred





TotalCommon Stock


Paid-In


Stock-Based


Accumulated


StockholdersShares


Amount


Capital


Compensation


Deficit


Equity (Deficit)Balance, December 31, 2003


817,261


$
8


$
693


$



$
(23,559
)

$
(22,858
)Amortization of beneficial
    conversion feature of Series A and B preferred stock










(252
)










(252
)Stock options exercised


4,451







6











6Changes to deferred compensation










206



(166
)






40Net loss


















(7,554
)


(7,554
)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
)

$
19,568    44




---



##### Table of Contents



RESTORE
    MEDICAL, INC.
  Statements of Cash Flows
   Year Ended December 31,2006


2005


2004Cash flows from operating
    activities:Net loss

$
(13,030
)

$
(7,022
)

$
(7,554
)Adjustments to reconcile net loss
    to net cash used in operating activities:Depreciation and amortization


193



169



111Stock-based compensation


1,853



559



40Put option gain










(871
)Preferred stock warrant (gain) loss


(500
)


572



(128
)Bad debt expense


97



62



14Non-cash interest expense


141



22



337Change in operating assets and
    liabilities:Trade receivables


(119
)


(1,028
)


(161
)Related-party receivables


(5
)


46



57Inventories


146



(328
)


(128
)Prepaid expenses


(121
)


(20
)


(3
)Other current assets


44



(50
)


(5
)Accounts payable


557



5



(111
)Accrued expenses


294



175



(194
)Accrued payroll and related expenses


(154
)


276



267Other long-term liabilities


7



7



Net cash used in operating
    activities


(10,597
)


(6,555
)


(8,329
)Cash flows from investing
    activities:Maturities of short-term investments


36,979



13,212



Purchase of short-term investments


(49,194
)


(7,286
)


(6,174
)Purchases of machinery and equipment


(190
)


(208
)


(160
)Net cash provided by (used in)
    investing activities


(12,405
)


5,718



(6,334
)Cash flows from financing
    activities:Proceeds from issuance of long-term
    debt


4,000



2,000



Increase in deferred offering costs






(61
)


Repayments on long-term debt


(997
)






(2,515
)Capital lease payments


(14
)


(1
)


Proceeds from stock options
    exercised


251



38



6Proceeds from sale of Series C
    and C-1 preferred stocks, net of financing costs and note
    conversion










18,577Net proceeds from initial public
    offering


27,681







Other


61







Net cash provided by financing
    activities


30,982



1,976



16,068Net increase in cash and cash
    equivalents


7,980



1,139



1,405Cash and cash equivalents:Beginning of year


3,397



2,258



853End of year

$
11,377


$
3,397


$
2,258Supplemental disclosure:Interest paid

$
593


$
4


$
88Non-cash investing and financing
    activities:Value of preferred stock warrants
    issued with long-term debt

$
273


$
169


$
Capital lease financing


116



25



Deemed 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







Conversion of notes payable to
    Series C-1
    preferred stock










5,880Conversion of interest payable to
    Series C-1
    preferred stock










497    45




---



##### Table of Contents



RESTORE
    MEDICAL, INC.
  Notes to Financial Statements
   (1)  Organization
    and Summary of Significant Accounting Policies
  Nature of Business ®
  Use of Estimates
  Cash and Cash Equivalents
  Short-term investments held-to-maturity held-to-maturity
  Fair Value of Financial Instruments
  Short-term investments
  Long-Term Debt
  Warrants Subject to Redemption
  Inventories first-in,
 46




---



##### Table of Contents



RESTORE MEDICAL, INC.
  Notes to Financial Statements  (Continued)
     December 31,


December 31,2006


2005Raw materials

$
57


$
113Work in process


320



372Finished goods


221



259$
598


$
744   Machinery and Equipment
  Impairment of Long-Lived Assets
  Deferred Debt Issuance Costs
  Revenue Recognition
   47




---



##### Table of Contents



RESTORE MEDICAL, INC.
  Notes to Financial Statements  (Continued)
      Number of


Percent of TotalCustomers


Net SalesDecember 31, 2004






0%December 31, 2005


1



11%December 31, 2006






0%     Number of


Percent of TotalCustomers


Net ReceivablesDecember 31, 2005


2



31
%December 31, 2006


2



26
%     Year Ended December 31,2006


2005


2004United States

$
4,580


$
3,416


$
937Asia Pacific


570



1,111



3Europe


487



153



5All other markets


249



174



$
5,886


$
4,854


$
945   Allowance for Doubtful Accounts
  2006


2005


2004Beginning balance

$
60


$
12


$
6Provision


97



62



14Write-offs


(71
)


(14
)


(8
)Ending balance

$
86


$
60


$
12   Warranty Costs
 48




---



##### Table of Contents



RESTORE MEDICAL, INC.
  Notes to Financial Statements  (Continued)
     2006


2005


2004Beginning balance

$
5


$



$
Warranty provision


15



17



1Warranty claims


(17
)


(12
)


(1
)Ending balance

$
3


$
5


$
     Stock-Based Compensation Share-Based Payment
    Severance
  2006


2005


2004Beginning balance

$
173


$
191


$
Expense


481



192



262Payments


(486
)


(210
)


(71
)Ending balance

$
168


$
173


$
191   Research and Development Costs
  Advertising Expense
 49




---



##### Table of Contents



RESTORE MEDICAL, INC.
  Notes to Financial Statements  (Continued)
    Foreign Currency Transactions
  Income Taxes
  Net Loss per Share
  Year Ended December 31,2006


2005


2004Net loss attributable to common
    stockholders

$
(33,829
)

$
(7,022
)

$
(7,806
)Weighted average common shares and
    equivalents outstanding:Common shares outstanding


9,999,671



839,518



818,244Warrants issued at a nominal
    exercise price


378,122



378,122



378,122Weighted average shares
    outstanding  basic and diluted


10,377,793



1,217,640



1,196,366Net loss per share 
    basic and diluted

$
(3.26
)

$
(5.77
)

$
(6.52
)   Recently Issued Accounting Statements Share Based Payment Accounting for
    Stock Based Compensation.
   50




---



##### Table of Contents



RESTORE MEDICAL, INC.
  Notes to Financial Statements  (Continued)
     Accounting Changes and Error Corrections  A
    Replacement of APB Opinion No. 20 and FASB Statement
    No. 3 Accounting
    Changes Reporting Accounting Changes in Interim Financial
    Statements
  Accounting for Uncertainty in Income Taxes, an interpretation
    of FASB Statement No. 109
  Considering the
    Effects on Prior Year Misstatements when Quantifying
    Misstatements in Current Year Financial Statements
  (2)  Machinery
    and Equipment, net
    Estimated2006


2005


Useful LivesFurniture and office equipment

$
95


$
79



5 yearsComputer hardware and software


390



303



3 yearsProduction and production support
    equipment


534



415



5 yearsLeasehold improvements


88



21



4 years1,107



818Less accumulated depreciation and
    amortization


(568
)


(392
)$
539


$
426  51




---



##### Table of Contents



RESTORE MEDICAL, INC.
  Notes to Financial Statements  (Continued)
     (3)  Accrued
    Expenses
    2006


2005Clinical trials

$
168


$
186Legal and accounting


188



12Other


583



447$
939


$
645   (4)  Long-Term
    Debt
    December 31,


December 31,2006


2005Term loan (interest at prime plus
    3% maturing December 2008), net of $74 debt discount at
    December 31, 2006 and $66 at December 31, 2005

$
4,930


$
1,933Capital lease for equipment
    (interest at 9.14%, monthly payments maturing September 2009)


18



24Capital lease for leasehold
    improvements (interest at 14.33%, monthly payments maturing
    March 2010)


27



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


80



5,055



1,957Less current portion, net of debt
    discount of $37 at December 31, 2006 and $22 at
    December 31, 2005


(2,192
)


(338
)Total long-term debt

$
2,863


$
1,619     2007

$
2,2292008


2,8322009


322010


222011


14$
5,129    52




---



##### Table of Contents



RESTORE MEDICAL, INC.
  Notes to Financial Statements  (Continued)
       Series C-1 Series C-1
  Series C-1 Series C-1 Series C-1
  Series C-1
  (5)  Income
    Taxes
    Year Ended December 31,2006


2005


2004Computed expected tax
    benefit


(34.0
)%


(34.0
)%


(34.0
)%State income tax


(3.1
)


(1.7
)


(1.8
)Change in state tax rate


(2.0
)






Nondeductible expenses






3.1



1.6Research and development tax credit


(0.9
)


(0.8
)


(1.2
)Other






0.1



Change in valuation allowance


40.0



33.3



35.4
%



%



%  53




---



##### Table of Contents



RESTORE MEDICAL, INC.
  Notes to Financial Statements  (Continued)
     December 31,2006


2005Deferred tax assets (liabilities):Reserves and accruals

$
188


$
95Machinery and equipment


(12
)


(6
)Net operating loss carryforwards


17,479



12,131Start-up
    costs


384



896Stock-based compensation


326



Deferred stock compensation






215Research tax credit carryforwards


488



223Net gross deferred tax assets


18,853



13,554Valuation allowance


(18,853
)


(13,554
)Net deferred tax assets

$



$
             (6)  Stockholders
    Equity (Deficit)
  1-for-2
   54




---



##### Table of Contents



RESTORE MEDICAL, INC.
  Notes to Financial Statements  (Continued)
    (7)  Participating
    Convertible Preferred Stock
  Series C-1 Series C-1 Series C-1 Series C-1
    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  55




---



##### Table of Contents



RESTORE MEDICAL, INC.
  Notes to Financial Statements  (Continued)
     Series A


Series B


Series C


Series C-1


TotalShares


Amount


Shares


Amount


Shares


Amount


Shares


Amount


Shares


AmountBalance, December 31, 2003


750,000


$
709



4,185,411


$
13,293






$







$




4,935,411


$
14,002Issued, net of issuance costs


















7,615,675



18,723



2,498,833



6,231



10,114,508



24,954Amortization of benefical
    conversion feature






38







214























252Balance, 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





$







$







$







$







$
   (8)  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


AverageShares


Price


Shares


Price


Shares


Price


Shares


PriceBalance as of:December 31, 2003


433,522


$
0.16



9,191


$
1.00



210,161


$
3.00






$
Exchanged


















(208,334
)


3.00



238,545



2.62December 31, 2004


433,522



0.16



9,191



1.00



1,827



3.00



238,545Granted


























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






$







$







$
  56




---



##### Table of Contents



RESTORE MEDICAL, INC.
  Notes to Financial Statements  (Continued)
     (9)  Preferred
    Stock Warrants Subject to Redemption
    (10)  Stock
    Options
     57




---



##### Table of Contents



RESTORE MEDICAL, INC.
  Notes to Financial Statements  (Continued)
      WeightedShares


Shares


Average


Weighted


OptionsAvailable for


Under


Exercise Price


Average


ExercisableGrant


Options


per Share


Fair Value


at Period EndBalance, December 31, 2003


367,550



502,687


$
1.06Granted


(525,875
)


525,875



1.10


$
1.36Exercised






(4,450
)


1.10Cancelled


137,748



(137,748
)


1.10Balance, 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







709,038     WeightedOutstanding


Vested and Exercisable


AverageWeighted








Weighted


RemainingAggregate(1)


Average





Aggregate(1)


Average


ContractualExercise Price

Shares


Intrinsic Value


Exercise Price


Shares


Intrinsic Value


Exercise Price


Life in Years$0.40


19,000











19,000











3.21.10


1,090,556











690,038











7.33.37


324,500























9.97.28


36,000























9.68.00


929,250























9.32,399,306


$
3,737


$
4.17



709,038


$
2,218


$
1.08



8.4     (1)
    
    The aggregate intrinsic value represents the total pre-tax
    intrinsic value, based on the Companys closing stock price
    of $4.21 as of December 29, 2006, which would have been
    received by the option holders had all option holders exercised
    their options as of that date. 58




---



##### Table of Contents



RESTORE MEDICAL, INC.
  Notes to Financial Statements  (Continued)
      WeightedAverage GrantShares


Date Fair ValueNon-vested at January 1, 2006


779,718


$
3.39Granted


1,380,200



3.95Vested


(338,094
)


2.89Forfeited


(131,556
)


4.24Non-vested at December 31,
    2006


1,690,268


$
3.85            59




---



##### Table of Contents



RESTORE MEDICAL, INC.
  Notes to Financial Statements  (Continued)
     In-the-money
  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     2006Volatility


67.5
%Risk-free interest rates


4.6
%Expected option life


90 DaysStock dividend yield


0
%  60




---



##### Table of Contents



RESTORE MEDICAL, INC.
  Notes to Financial Statements  (Continued)
     (11)  Commitments
    and Contingencies
  Leases
        Operating


CapitalLeases


Leases2007

$
376


$
402008


385



402009


383



382010


288



252011






15Total future minimum lease payments


1,432



158Less amounts representing interest






(33
)Total capital lease obligations





$
125Less noncancelable sublease
    payments:2007


(168
)2008


(104
)(272
)Minimum lease payments

$
1,160   (12)  Retirement
    Plan
   61




---



##### Table of Contents



RESTORE MEDICAL, INC.
  Notes to Financial Statements  (Continued)
    (13)  Quarterly
    Financial Data (Unaudited)
  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 attributable to common
    stockholders


(3,054
)


(22,956
)


(3,728
)


(4,091
)


(33,829
)Net loss per share

$
(2.48
)

$
(2.74
)

$
(0.24
)

$
(0.26
)

$
(3.26
)   Year Ended December 31, 2005Q1


Q2


Q3


Q4


TotalNet sales

$
903


$
1,162


$
1,227


$
1,562


$
4,854Gross margin


463



808



858



1,084



3,213Loss from operations


(1,912
)


(1,702
)


(1,304
)


(1,657
)


(6,575
)Net loss


(2,048
)


(1,918
)


(1,349
)


(1,707
)


(7,022
)Net loss per share

$
(1.70
)

$
(1.57
)

$
(1.11
)

$
(1.39
)

$
(5.77
)    62




---



##### Table of Contents



Item 9.
    CHANGES
    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL DISCLOSURE    Item 9A.
    CONTROLS
    AND PROCEDURES    Rule 13a-15(f)
  Item 9B.
    OTHER
    INFORMATION   PART III    Item 10.
    DIRECTORS,
    EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE    Regulation S-K
  Form 10-K),
  Item 11.
    EXECUTIVE
    COMPENSATION   63




---



##### Table of Contents



Item 12.
    SECURITY
    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
    RELATED STOCKHOLDER MATTERS.  (a)  Equity
    Compensation Plans
    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


3,140,921
(1)

$
3.59



588,407
(2)Equity compensation plans not
    approved by security holders










Total


3,140,921


$
3.59



588,407    (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, 2006.  (b)  Security
    Ownership
    Item 13.
    CERTAIN
    RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR
    INDEPENDENCE    Item 14.
    PRINCIPAL
    ACCOUNTANT FEES AND SERVICES    PART IV  Item 15.
    EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULE  (a)  The
    following documents are filed as part of this Annual Report on
    Form 10-K:
      (b)  Exhibits:
   64




---



##### Table of Contents



SIGNATURES    Restore Medical, Inc.
  By:
    /s/  J.
    Robert Paulson, Jr.     POWER OF
    ATTORNEY
  attorneys-in-fact Form 10-K attorney-in-fact attorney-in-fact
    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  65




---



##### 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)). 66




---



##### 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)).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. 67