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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(MARK ONE)

For the fiscal year ended December 31, 2004

OR

For the transition period from __________________ to ________________

Commission file number: 0-27605

VASCULAR SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)

6464 Sycamore Court
Minneapolis, Minnesota 55369
(Address of principal executive offices, including zip code)

(763) 656-4300
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
___________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  [X]   No  [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   [X]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).   Yes  [X]   No  [   ]

The aggregate market value of voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold on June 30, 2004 was $118,383,145.

As of February 4, 2005, the number of shares outstanding of the registrant’s common stock was 14,352,547.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for its 2005 Annual Meeting of Shareholders to be held on April 19, 2005 are incorporated by reference in Part III of this Annual Report on Form 10-K.

PART I

ITEM 1.   BUSINESS

Overview

        Vascular Solutions, Inc. (we, us or Vascular) is a medical device company focused on bringing clinically advanced solutions to interventional cardiologists and interventional radiologists worldwide. We were incorporated in the state of Minnesota in December 1996, and we began operations in February 1997. Our current product line consists of the following medical devices:

As a vertically-integrated medical device company, we generate ideas and create new interventional medical devices, and then deliver these products directly to the physician through our direct domestic sales force and our international distribution network.

        We currently have in development several additional products that leverage our existing infrastructure to bring additional solutions to the interventional cardiologist and interventional radiologist. Additional products that we expect to gain regulatory clearance and market launch before the end of 2005 in the United States include the following medical devices:

Interventional Cardiology and Interventional Radiology Industry Background

        Over 60 million Americans have one or more types of cardiovascular disease—diseases of the heart and blood vessels. Cardiovascular disease is the number one cause of death in the United States and is replacing infectious disease as the world’s pre-eminent health risk. Advances in medicine have enabled physicians to perform an increasing number of diagnostic and therapeutic treatments of cardiovascular disease using minimally invasive methods, such as catheters placed inside the arteries, instead of highly invasive open surgery. Cardiologists and radiologists use diagnostic procedures, such as angiography, to confirm, and interventional procedures, such as angioplasty and stenting, to treat diseases of the coronary and peripheral arteries. Based on industry statistics, we estimate that cardiologists and radiologists performed over nine million diagnostic and interventional catheterization procedures worldwide in 2004. Oftentimes, these procedures are performed to remove blood clots or plaque which have been generated and deposited inside the patient’s artery and are an impediment to normal blood flow. The number of catheterization procedures performed is expected to grow by more than 5% each year for the next three years as the incidence of cardiovascular disease continues to increase. The overall interventional medical device market in 2004 exceeded $5 billion worldwide.

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        Each procedure using a catheter requires a puncture in an artery, usually the femoral artery in the groin area and sometimes the radial artery in the wrist of the patient to gain access for the catheter. The catheter then is deployed through an introducer sheath and into the vessel to be diagnosed or treated. Upon completion of the procedure and removal of the catheter, the physician must seal this puncture in the artery and the tissue tract that leads from the skin surface to the artery to stop bleeding. The traditional method for sealing the puncture site has been a manual process whereby a healthcare professional applies direct pressure to the puncture site, sometimes using a sand bag or a large C-clamp, for 20 minutes to an hour in order to form a blood clot. The healthcare professional then monitors the patient, who must remain immobile in order to prevent dislodging of the clot, for an additional four to 48 hours.

        Patients subjected to manual compression generally experience significant pain and discomfort during compression of the puncture site and during the period in which they are required to be immobile. Many patients report that this pain is the most uncomfortable aspect of the catheterization procedure. In addition, patients can develop a substantial coagulated mass of blood, or hemotoma, around the puncture site, limiting patient mobility for up to six weeks following the procedure. Finally, the need for healthcare personnel to provide compression and the use of hospital beds during the recovery period results in substantial costs to the institution which, under virtually all current healthcare payment systems, are not separately reimbursed.

        Until 1996, manual compression was used following virtually all catheterization procedures. In late 1995, the first vascular sealing device which did not rely on compression was introduced in the United States. In addition to our Duett sealing device, three other invasive sealing devices have received FDA approval and are currently being marketed around the world. In the aggregate, over $380 million of the five FDA-approved invasive sealing devices were sold worldwide in 2004, compared to less than $20 million in 1996. In addition to invasive (below the skin surface) sealing devices, starting in 2000, non-invasive “patches” have begun to be used as an assistance to manual compression following catheterizations. Non-invasive patches are used by physicians who (principally due to cost, complexity or risk of complications) do not wish to use invasive sealing devices, and for those patients who are contra-indicated for an invasive sealing device. Based on the number of catheterization procedures performed annually by cardiologists and radiologists, industry sources report that the total market opportunity for vascular sealing devices (invasive and non-invasive) is more than $1 billion annually.

D-Stat Dry and D-Stat Radial Hemostat Products

        In September 2003 we received regulatory clearance and commenced sales of our D-Stat Dry hemostatic bandage in the United States and international markets. The D-Stat Dry hemostatic bandage is a version of our proprietary blood clotting substance that is lyophilized (freeze-dried) into a gauze pad and combined with an adhesive bandage for application. The D-Stat Dry is used as an assistance for manual compression to manage bleeding after catheterization procedures. We believe that the market for a hemostatic pad in this indication has grown substantially since the first competitive patch was introduced in 2000, with a market size greater than $40 million in 2004.

        We believe that the D-Stat Dry has many potential uses beyond this initial application, and to date, we have developed four variations of our D-Stat Dry — the D-Stat 2Dry, the D-Stat Clamp, the D-Stat Radial and the D-Stat Dry 3x3. The D-Stat 2 Dry is a convenient 2-bandage version of the D-Stat Dry used in the dialysis market. The D-Stat Clamp utilizes our D-Stat Dry pad and is configured for attachment to standard compression devices.

        The D-Stat Radial hemostat band is a specially-sized version of the D-Stat Dry that includes a compression band that allows it to be applied over the radial artery in the wrist. In approximately 5% of all catheterizations, the radial artery in the wrist instead of the femoral artery in the groin is used to gain arterial access. In these cases using the radial artery, the health care professional must control bleeding from the artery after the procedure. A variety of compression splints and tapes have been used for this purpose. The D-Stat Radial is the first device that contains an active blood clotting agent together with the compression

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collar for this purpose. We received regulatory clearance for the D-Stat Radial hemostat band in September 2003, and made manufacturing improvements to the product before launching it in the United States in early 2004.

        At the end of the first quarter of 2004 we received regulatory clearance in the United States for the D-Stat Dry 3x3 bandage. The 3x3 version of the D-Stat Dry, which is designed for use in trauma indications, continues to proceed through clinical evaluations and discussions with potential corporate distribution partners. The 3x3 version of the D-Stat Dry is a bandage that does not require mixing or special storage requirements and it can be quickly applied to even severely bleeding wounds. During the fourth quarter of 2004, we advanced discussions with two potential corporate partners that have expressed an interest in branding and distributing this product for us on an exclusive or non-exclusive basis, pending further due diligence and negotiations. We also have conducted clinical evaluations at 11 U.S. trauma centers and four U.S. military operations in Iraq that requested the product directly from us. To date, we have received feedback on approximately 60 successful deployments, with no adverse events reported, all from the U.S. trauma centers.

Pronto Extraction Catheter

        Our Pronto product consists of an extraction catheter with a proprietary distal tip and large extraction lumen that can be delivered into arteries to mechanically remove blood clots using simple vacuum suction. The Pronto extraction catheter was initially developed by Dr. Pedro Silva of Milan, Italy, who exclusively licensed the design to us in 2002. We received CE mark approval and commenced international sales of the Pronto in August 2003, and received FDA clearance in December 2003 and commenced sales in the United States in early 2004. In the fourth quarter of 2004 we completed development work on the third generation design of the Pronto, called the Pronto V3, which we expect to launch in the United States in the third quarter of 2005. We believe this new version of the Pronto incorporates several improvements that physicians have requested, and we believe there will be a very substantial boost to our Pronto sales starting in the fourth quarter of 2005. We believe that the market size for the removal of soft thrombus is greater than $100 million per year worldwide.

Vari-Lase Endovenous Laser Products

        Our Vari-Lase endovenous laser products consist of a laser console, procedure kits and accessories used in the treatment of reflux of the great saphenous vein, commonly referred to as varicose veins. More than one million people in the United States seek treatment each year for varicose veins. Left untreated, varicose veins can result in serious clinical consequences, including limited mobility and venous ulcers. Historically, an invasive surgical procedure known as vein stripping was the only treatment for severe varicose veins. While vein stripping is still performed on over 100,000 patients each year in the United States, a new non-surgical procedure using endovenous laser energy to treat and close the diseased vein has emerged since 2002 as a preferred alternative. Recent clinical data on endovenous laser therapy has demonstrated excellent clinical results and outstanding patient satisfaction. During the fourth quarter of 2004 the Center for Medicare and Medicaid Services (CMS) published the Medicare Physicians Fee Schedule which established favorable reimbursement rates for the endoveneous laser procedure starting January 1, 2005. Private insurance also has continued its favorable trend with coverage decisions which have caused more physicians to add this procedure to their practice. We believe the current U.S. market size for treating varicose veins using endovenous therapy is greater than $60 million per year.

        The first product we launched in our Vari-Lase product line was our Vari-Lase procedure kit in July 2003 in the United States. Our procedure kit is custom-designed for the endovenous procedure, with features supporting ease-of-use and safety, and is compatible with the competitive laser consoles already in use for this procedure. In December 2003 we received FDA clearance for our laser console, which we have manufactured to our specifications by MedArt Corporation, a subsidiary of Asah Medico, a leading Denmark-based medical laser manufacturer. During 2004 we developed and commenced sales of our Auto-Fill™ syringe and Vari-Lase procedure packs as accessory products to the Vari-Lase product line. The Auto-Fill

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syringe is an easy fluid delivery system for tumescent local anesthesia. The Vari-Lase Procedure Pack is a complete sterile pack of accessories designed for endovenous laser procedures. To complete our Vari-Lase product line, we sell micro-introducers and guidewires which are used as accessory items in the endovenous laser procedure as well as used in other interventional medical procedures.

Duett Sealing Device

        The first product we brought to market, the Duett sealing device, is designed to provide a complete seal of the puncture site following catheterization procedures such as angiography, angioplasty and stenting. Our Duett sealing device combines an easy-to-use balloon catheter delivery mechanism with a biological procoagulant mixture, which we believe offers advantages over both manual compression and competitive vascular sealing devices. We began selling our Duett sealing device in Europe in February 1998 and in the United States in June 2000. Over 200,000 Duett sealing devices have been sold and deployed worldwide. In the fourth quarter of 2001 we introduced the Diagnostic Duett version of the Duett sealing device, which utilizes a lower dose of procoagulant for the less-challenging diagnostic subset of catheterization procedures. In mid-2002 we introduced the next generation “Pro” line of the Duett sealing device for improved ease-of-use. In 2003 we made the decision to reduce our focus on growing the Duett product line in order to focus on increasing sales of our new products.

        We believe our Duett sealing device (1) offers a complete seal of the puncture site with nothing left behind in the artery, (2) is an easy-to-use system and (3) minimizes patient discomfort and permits early ambulation. Our product uses a balloon catheter, a device already familiar to cardiologists and radiologists, which is inserted through the introducer sheath that is already in the patient. The inflated balloon serves as a temporary mechanical seal, preventing the flow of blood from the artery. Our biological procoagulant, which is a proprietary mixture of collagen, thrombin and diluent, is then delivered to the puncture site, stimulating rapid clotting and creating a complete seal of both the arterial puncture and the tissue tract from the artery to the skin surface. The blood-clotting speed and strength of thrombin enables the use of the Duett sealing device even in the presence of powerful anti-clotting medications, such as ReoPro®, increasingly used in interventional catheterization procedures. With our Duett sealing device, nothing is left behind in the artery, so immediate reaccess of the site, if necessary, is possible, and the potential for infection is minimized.

D-Stat Flowable Hemostat

        The second product we developed and commercialized is the D-Stat Flowable hemostat, which we began selling worldwide in February 2002. The D-Stat Flowable hemostat is a blood clotting material that can be delivered topically and into voids and open spaces to control active bleeding. The D-Stat Flowable offers the advantage of being thick to maintain its position, yet easily deliverable. The D-Stat Flowable consists of the same collagen, thrombin and diluent components as the Duett sealing device, which has been proven effective in controlling bleeding from aggressive arterial puncture sites.

        The D-Stat Flowable hemostat can be used in a wide variety of interventional procedures as an adjunct to hemostasis. An example of these uses includes sealing the access site after the removal of catheters from A-V access grafts. We believe that the D-Stat Flowable hemostat is the only hemostat available in the United States that combines the thick consistency and extremely flowable delivery that is preferred by the interventional physician in these opportunities.

        We commenced sales of the D-Stat Flowable worldwide in the first quarter of 2002. Currently, the approved clinical indications for the D-Stat Flowable are limited to topical bleeding and blood “oozing” following percutaneous procedures. We believe these indications are but a small fraction of the total potential market for the D-Stat Flowable. In December 2004 we completed enrollment in a 268 patient clinical study of the use of the D-Stat Flowable in the hemostasis of prepectoral pockets created in pacemaker and defibrillator implantations. We expect that follow-up should be completed in this “Pocket Protector” clinical study and, assuming satisfactory data, the PMA will be submitted to the FDA by the middle of 2005. We estimate that the U.S. market opportunity for this prepectoral pocket indication is greater than 100,000

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procedures (or $10 million) annually. We also believe that the D-Stat Flowable has application for use to seal following breast biopsy and liver biopsy procedures, each of which we believe can match or exceed the prepectoral pocket market opportunity for D-Stat Flowable.

Langston Dual Lumen Pigtail Catheter

        At the end of the third quarter of 2004 we received regulatory clearance in the United States for the Lanston dual lumen pigtail catheter. The Langston catheter is used for the precise measurement of intravascular pressure gradients, primarily measured to diagnose aortic valve stenosis. We believe our Langston catheter is the only dual lumen pigtail catheter on the U.S. market that can be used for this intended indication.

        Our first configuration of the Langston catheter is in an 8 French size. Due to customer requests, we have recently submitted our 510(k) application for a smaller 7 French size of the product that we expect will be launched during the second quarter of 2005, and we have prototyped a 6 French size that we believe we could have on the U.S. market by the end of 2005. We believe the U.S. market potential for all of the Langston catheter product line is $10 million annually.

MAX-Support abdominal retraction belt

        During the first quarter of 2005 we launched the MAX-Support abdominal retraction belt. This product is a tape-free retraction system to expose the femoral artery puncture site in obese patients. Nationwide, approximately 7% of catheterization laboratory patients require taping of their belly apron to allow visualization of the femoral crease for the purpose of gaining access for the catheterization. The Max-Support belt is a tape-free alternative that avoids the discomfort, inefficiencies and time involved in the current practice of taping. We believe the market potential for the MAX-Support belt is approximately $1 million annually with no existing competition.

Acolysis Ultrasound Thrombolysis System

        During the second quarter of 2002 we acquired the Acolysis ultrasound thrombolysis system. The Acolysis system uses ultrasound energy generated by the Acolysis controller that is delivered intravascularly by the disposable Acolysis probe to lyse blood clots and plaque. The Acolysis controller and probes are sold only in international markets, where it has been sold principally for the treatment of peripheral vascular disease. Upon completion of our acquisition and integration of the Acolysis business, we commenced active international sales of the Acolysis probes through our existing international distribution network in late 2002.

        The Acolysis ultrasound thrombolysis system uses high energy, low frequency ultrasound to lyse thrombus into subcapillary particles without damaging vessel walls. The therapeutic principle of the Acolysis system is to generate ultrasound thrombolysis by the selective disruption of the fibrin matrix of the thrombus. Cavitation produces subcapillary-sized particles, resulting in a debulking of the arterial lesion. The first application of the Acolysis product is to treat chronic occlusions in peripheral arteries. Peripheral vascular disease currently affects over eight million people worldwide, with limited effective treatment options. We believe the Acolysis product represents a new approach in both therapy and technology, and initial clinical experience and one-year follow-up with the product have been favorable.

        Our international sales efforts on the Acolysis product began in 2002 on a limited basis. We are in the process of working on our next generation Acolysis ultrasound thrombolysis system. Once we complete our improvement on the current system we will plan and structure a clinical study in the United States to study the effectiveness of the use of the Acolysis system to open chronic peripheral occlusions, with the study not expected to be completed before 2007.

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Business Strategy

        Our primary objective is to establish ourselves as a leading supplier of clinically superior medical devices for substantial opportunities within interventional medicine. The key steps in achieving our primary objective are the following:

Sales, Marketing and Distribution

        In the third quarter of 2000 we commenced sales of our Duett sealing device in the United States through our direct sales organization. As of December 31, 2004, our direct sales force consisted of approximately 57 employees. We believe that the majority of interventional catheterization procedures in the United States are performed in high volume catheterization laboratories, and that these institutions can be served by our focused direct sales force. We also believe that our sales force is able to sell each of our new products to the same customer base.

        As part of our sales strategy, our sales force is clinically trained and is able to train physicians and other healthcare personnel on the use of our products. We believe that effective training is a key factor in encouraging physicians to use interventional medical devices. We have created, and will continue to work to improve, an in-the-field training program for the use of all of our products. We also develop and maintain close working relationships with our customers to continue to receive input concerning our product development plans.

        We are focused on building market awareness and acceptance of our products. Our marketing organization provides a wide range of programs, materials and events that support our sales force. These include product training, conference and trade show appearances and sales literature and promotional materials. Members of our medical advisory board also aid in marketing our products by publishing articles and making presentations at physicians’ meetings and conferences.

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        Our international sales and marketing strategy has been to sell to interventional cardiologists and interventional radiologists through established independent distributors in major international markets, subject to required regulatory approvals. In Germany, we created our wholly-owned subsidiary Vascular Solutions GmbH to sell directly to customers in the German market beginning in the fourth quarter of 2000. In most of the other major developed markets our products are currently marketed through independent distributors. Under multi-year written distribution agreements with each of our independent distributors, we ship our products to these distributors upon receipt of purchase orders. Each of our independent distributors has the exclusive right to sell our products within a defined territory. These distributors also market other medical products, although they have agreed not to sell directly competitive products. Our independent distributors purchase our products from us at a discount from list price and resell the device to hospitals and clinics. Sales to international distributors are denominated in United States dollars. The end-user price is determined by the distributor and varies from country to country.

New Product Development

        Our research and development staff is currently focused on developing new products to sell to our existing customer base through our direct sales force and on developing next generation versions of our existing products. We incurred expenses of $3,400,864 in 2004, $3,670,935 in 2003 and $3,227,538 in 2002 for research and development activities. To further leverage our efficiencies, our research and development group continues to develop in-house capabilities to manufacture some of the components currently produced by outside vendors.

        In addition to our normal research and development expenses, in the fourth quarter of 2004 we incurred $210,069 in thrombin qualification expenses relating to our project to qualify a new source of thrombin. On October 18, 2004, we entered into a supply agreement with Sigma-Aldrich Fine Chemicals, an operating division of Sigma-Aldrich, Inc. (Sigma) for the supply of thrombin for use in our hemostatic products. The Sigma contract is the start of our plan to fully qualify a new source of thrombin and to bring the new thrombin through the regulatory process over the next two years. We expect our total estimated expenditures will be $6.1 million to complete this project, including the costs associated with the Sigma agreement. Of the total expenditures, we expect approximately $3.3 million will be for development expenses, $0.3 million will be for capital equipment and $2.5 million will be for the purchase of inventory of thrombin. The purchase of the $2.5 million in thrombin is expected to be used in our hemostatic products beginning in 2007. Following the qualification of the Sigma thrombin, we believe we can launch several additional new thrombin-based surgical products into the existing $200 million annual U.S. thrombin market, which currently has only one competitor.

        We expect our research and development activities to continue to expand to include evaluation of new concepts and products for the interventional cardiology and interventional radiology field. We believe that there are many potential new interventional products that would fit within the development, clinical, manufacturing and distribution network we have created for our existing products.

Manufacturing

        We manufacture our products in our facility in a suburb of Minneapolis, Minnesota. The catheter manufacturing and packaging processes occur under a controlled clean room environment. Our manufacturing facility and processes were certified in July 1998 as compliant with the European Community’s EN 46001 standards and were audited most recently in April 2004 for compliance with the FDA’s quality systems regulations with no deficiencies noted. In March 2003 we moved to our current facility, and the FDA approved our new facility in May 2003, also with no deficiencies noted.

        We purchase components from various suppliers and rely on single sources for several parts of the Duett sealing device and D-Stat flowable hemostat. In September 1998, we entered into a ten year, sole-source, supply agreement with our collagen supplier, Davol Inc., that provides for a fixed price based on volume purchases which is adjusted annually for increases in the Department of Labor’s employer’s cost index. In

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June 1999, we entered into a five year, sole-source, supply agreement with our thrombin supplier, GenTrac, Inc., a subsidiary of King Pharmaceuticals, Inc., that provides for a fixed price with a price adjustment formula based on increased costs and wholesale price increases. Our agreement with GenTrac, Inc. expires in May 2005. As a result of the favorable price provisions in our current thrombin supply agreement, we expect to increase our inventory of thrombin by approximately $3 million during the second and third quarters of 2005, which we believe will be sufficient for all of our thrombin requirements through the end of 2006. To date, we have not experienced any significant adverse effects resulting from shortages of components.

        The manufacture and sale of our products entails significant risk of product liability claims. Although we have product liability insurance coverage in an amount which we consider reasonable, it may not be adequate to cover potential claims. Any product liability claims asserted against us could result in costly litigation, reduced sales and significant liabilities and divert the attention of our technical and management personnel away from the development and marketing of our products for significant periods of time.

Competition

        Competition in the interventional medical device industry is intense and dominated by very large and experienced companies such as Medtronic, Inc., Abbott Laboratories and Boston Scientific. We compete on the basis of our clinically differentiated products and focused opportunities within this interventional medical device market.

        Our D-Stat Dry hemostatic bandage competes in the noninvasive topical patch market segment of sealing devices. These patches are applied directly over the puncture site and held in place with adjunctive manual compression for a period of 10-20 minutes. These patches include:

        The Pronto extraction catheter competes in the market segment for removal of thrombus from the arterial system. There are many companies that are selling or have developed products in this segment, including Possis Medical, Medtronic, Boston Scientific and ev3.

        We are aware of five companies that sell a product for the endovenous laser treatment of varicose veins. These companies are AngioDynamics, biolitec, Dornier MedTech, CoolTouch and Diomed. Each of these companies’ products contain the same components for the therapy but differ in procedural training, laser wavelength, custom-designed features and customer support. In addition, VNUS Medical Technologies sells a radiofrequency alternative to the laser for the treatment of varicose veins.

        Our Duett sealing device principally competes with three vascular sealing devices and manual compression. The three principal competitive vascular sealing devices are:

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        There are many companies that are selling or have developed hemostats which compete generally with our D-Stat Flowable hemostat. Virtually all of these devices, however, are positioned as hemostats for the surgical market and are not designed specifically for use in interventional procedures.

        In each of our product areas, we believe that several other companies are developing new devices. The medical device industry is characterized by rapid and significant technological change as well as the frequent emergence of new technologies. There are likely to be research and development projects related to these market areas of which we are currently unaware. A new technology or product may emerge that results in a reduced need for our products or results in a product that renders our product noncompetitive.

Regulatory Requirements

United States

        Our products are regulated in the United States as medical devices by the FDA under the Federal Food, Drug and Cosmetic Act. The FDA classifies medical devices into one of three classes based upon controls the FDA considers necessary to reasonably ensure their safety and effectiveness. Class I devices are subject to general controls such as labeling, adherence to good manufacturing practices and maintenance of product complaint records, but are usually exempt from premarket notification requirements. Class II devices are subject to the same general controls and also are subject to special controls such as performance standards, and FDA guidelines, and may also require clinical testing prior to approval. Class III devices are subject to the highest level of controls because they are used in life-sustaining or life-supporting implantable devices. Class III devices require rigorous clinical testing prior to their approval and generally require a premarket approval (PMA) application prior to their sale.

        If a medical device manufacturer can establish that a device is “substantially equivalent” to a legally marketed Class I or Class II device, or to an unclassified device, or to a Class III device for which the FDA has not called for PMAs, the manufacturer may seek clearance from the FDA to market the device by filing a 510(k) premarket notification. The 510(k) notification must be supported by appropriate data establishing the claim of substantial equivalence to the satisfaction of the FDA. Following submission of the 510(k) notification, the manufacturer may not place the device into commercial distribution in the United States until an order is issued by the FDA.

        Manufacturers must file an investigated device exemption (or IDE) application if human clinical studies of a device are required and if the FDA considers experimental use of the device to represent significant risk to the patient. The IDE application must be supported by data, typically including the results of animal and mechanical testing of the device. If the IDE application is approved by the FDA, human clinical studies may begin at a specific number of investigational sites with a maximum number of patients, as approved by the FDA. The clinical studies must be conducted under the review of an independent institutional review board to ensure the protection of the patients’ rights.

        Generally, upon completion of these human clinical studies, a manufacturer seeks approval of a Class III medical device from the FDA by submitting a PMA application. A PMA application must be supported by extensive data, including the results of the clinical studies, as well as literature to establish the safety and effectiveness of the device.

        Our Duett sealing device is classified as a Class III device and is subject to the PMA requirements. In May 1997, the FDA determined that the review of the Duett sealing device would be delegated to the Center for Devices and Radiological Health area of the FDA, with a consulting review by the Center for Biologic Evaluation and Research. During 1998 and 1999, we received approval of our IDE application to start our feasibility clinical study, filed our IDE Supplement to begin our multi-center clinical study, completed the SEAL multi-center clinical study and filed our PMA application with the FDA. In September 1999 our manufacturing facility was audited by the FDA, with no deficiencies or non-compliances noted by the

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inspector. In December 1999, we received the FDA’s review letter of our PMA application, and we submitted an amendment to our PMA to the FDA in January 2000. On June 22, 2000, we received approval from the FDA of our PMA application to sell the Duett sealing device in the United States.

        Our D-Stat Flowable, D-Stat Dry, D-Stat Radial, D-Stat Clamp, Pronto, Langston Catheter and Vari-Lase products also are regulated in the United States as medical devices by the FDA and required clearance of our 510(k) notification by the FDA prior to being sold in the United States. Each of these devices was the subject of a 510(k) notification which was determined to be “substantially equivalent” to a legally marketed predicate device by the FDA, thereby allowing commercial marketing in the United States. We received FDA clearance for these products in the following months:

        We also are subject to FDA regulations concerning manufacturing processes and reporting obligations. These regulations require that manufacturing steps be performed according to FDA standards and in accordance with documentation, control and testing standards. We also are subject to inspection by the FDA on an on-going basis. We are required to provide information to the FDA on adverse incidents as well as maintain a documentation and record keeping system in accordance with FDA guidelines. The advertising of our products also is subject to both FDA and Federal Trade Commission jurisdiction. If the FDA believes that we are not in compliance with any aspect of the law, it can institute proceedings to detain or seize products, issue a recall, stop future violations and assess civil and criminal penalties against us, our officers and our employees.

International

        The European Union has adopted rules which require that medical products receive the right to affix the CE mark, an international symbol of adherence to quality assurance standards and compliance with applicable European medical device directives. As part of the CE compliance, manufacturers are required to comply with the ISO series of quality systems standards. We received the CE mark approval for our Duett sealing device and certification of our quality system in July 1998, and we received the CE mark approval for our other products in the following months:

        International sales of our products are subject to the regulatory requirements of each country in which we sell. These requirements vary from country to country but generally are much less stringent than those in the United States. We have obtained regulatory approvals where required for us to sell our products in the country. Through our Japanese distributor, we are pursuing the regulatory approval of our Pronto extraction catheter for commercial sale in Japan, which we expect will be completed in the first half of 2005.

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Third Party Reimbursement

        In the United States, healthcare providers that purchase medical devices, generally rely on third-party payors, principally the Centers for Medicare and Medicaid Services or CMS (formerly the Health Care Financing Administration, or HCFA), and private health insurance plans, to reimburse all or part of the cost of therapeutic and diagnostic catheterization procedures. We believe that in the current United States reimbursement system, the cost of vascular sealing devices is incorporated into the overall cost of the catheter procedure. Our other products are subject to reimbursement rules depending on the specific medical procedure in which they are utilized.

        Market acceptance of our products in international markets is dependent in part upon the availability of reimbursement from healthcare payment systems. Reimbursement and healthcare payment systems in international markets vary significantly by country. The main types of healthcare payment systems in international markets are government sponsored healthcare and private insurance. Countries with government sponsored healthcare, such as the United Kingdom, have a centralized, nationalized healthcare system. New devices are brought into the system through negotiations between departments at individual hospitals at the time of budgeting. In most foreign countries, there are also private insurance systems that may offer payments for alternative therapies.

Patents and Intellectual Property

        We file patent applications to protect technology, inventions and improvements that are significant to the development of our business, and use trade secrets and trademarks to protect other areas of our business. Prior to the formation of our company, Dr. Gary Gershony filed a number of patent applications in the United States and other countries directed to proprietary technology used in our Duett sealing device. Upon the commencement of our operations in February 1997, Dr. Gershony assigned all patents and patent applications relating to the Duett sealing device to us on a worldwide, perpetual, royalty-free basis. At the time of assignment, there existed one United States patent issued that is directed to a balloon catheter sealing device and method and which expires in May 2013, three United States patents pending and an international patent application pending which designated numerous foreign countries and regions.

        Since commencing operations, we have continued the prosecution of the pending United States patent applications and filed new patent applications. A second United States patent was issued that is directed to a balloon catheter and procoagulant sealing device and method and which expires in October 2015. A third United States patent was issued that contains method claims concerning the use of a balloon catheter and flowable procoagulant and which expires in October 2015. A fourth United States patent was issued concerning our procoagulant mixture and which expires in October 2015. A fifth United States patent was issued concerning a balloon catheter sealing device and which expires in May 2013. A sixth United States patent was issued concerning a balloon catheter and procoagulant sealing device and which expires in October 2015. A seventh United States patent was issued concerning a balloon catheter sealing device and which expires in October 2015. We currently have five additional United States patents issued and seven additional patents pending concerning new versions of our Duett sealing device, our Pronto catheter, our Langston dual lumen pigtail catheter, our MAX-Support abdominal retraction belt and our D-Stat Dry product. We also have pursued international patent applications, which designate the key developed nations with substantive patent protection systems.

        The interventional medical device market in general, and the vascular sealing device and endovenous laser therapy fields in particular, are characterized by frequent and substantial intellectual property litigation. Each of the vascular sealing products currently on the U.S. market, including our Duett sealing device, has been subject to infringement litigation. (See “Legal Proceedings” in Item 3 of Part I of this Form 10-K.) In addition, one of our competitors in the endovenous laser therapy market (Diomed) has brought five separate intellectual property lawsuits against its competitors, including two against us. The interpretation of patents

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involves complex and evolving legal and factual questions. Intellectual property litigation in recent years has proven to be complex and expensive, and the outcome of such litigation is difficult to predict.

        We may become the subject of additional intellectual property claims in the future related to our products. Our defense of any intellectual property claims filed in the future, regardless of the merits of the complaint, could divert the attention of our technical and management personnel away from the development and marketing of our products for significant periods of time. The costs incurred to defend future claims could be substantial and adversely affect us, even if we are ultimately successful.

        We also rely on trade secret protection for certain aspects of our technology. We typically require our employees, consultants and vendors for major components to execute confidentiality agreements upon their commencing services with us or before the disclosure of confidential information to them. These agreements generally provide that all confidential information developed or made known to the other party during the course of that party’s relationship with us is to be kept confidential and not disclosed to third parties, except in special circumstances. The agreements with our employees also provide that all inventions conceived or developed in the course of providing services to us shall be our exclusive property.

        We also register the trademarks and trade names through which we conduct our business. To date, we have registered the trademarks “D-Stat,” and “Vari-Lase,” and have applied for registration in the United States of the marks “Vascular Solutions Duett,” “Pronto,” “MAX-Support,” “Langston,” “SideKick,” “Skyway,” and the Duett stylized logo. We acquired the registered trademark “Acolysis” in connection with our acquisition of the Acolysis therapeutic ultrasound business in 2002.

Employees

        As of December 31, 2004, we had 144 full time employees. Of these employees, 32 were in manufacturing activities, 72 were in sales and marketing activities, 12 were in research and development activities, 17 were in regulatory, quality assurance and clinical research activities and 11 were in general and administrative functions. We have never had a work stoppage and none of our employees are covered by collective bargaining agreements. We believe our employee relations are good.

Executive Officers of the Registrant

        The executive officers of the Company as of February 4, 2005 are as follows:

        Howard Root has served as our Chief Executive Officer and a director since he co-founded Vascular Solutions in February 1997. From 1990 to 1995, Mr. Root was employed by ATS Medical, Inc., a mechanical heart valve company, most recently as Vice President and General Counsel. Prior to joining ATS Medical, Mr. Root practiced corporate law, specializing in representing emerging growth companies, at the law firm of Dorsey & Whitney for over five years. Mr. Root received his B.S. in Economics and J.D. degrees from the University of Minnesota.

        Michael Nagel has served as our Vice President of Sales since June 1997. Prior to joining us, Mr. Nagel was the Director of Sales & Marketing at Quantech, Ltd., a developer of point of care medical diagnostic

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testing products, where he worked since July 1996. From 1992 through July 1996, Mr. Nagel was the mid-west division sales manager of B. Braun Cardiovascular, a manufacturer of cardiovascular devices and catheters. From 1991 through 1992, Mr. Nagel was the Director of Worldwide Sales for the Medical Products Division of Angeion Corporation, a manufacturer of angioplasty accessories and pediatric catheters. Prior to 1991, Mr. Nagel performed a variety of sales and marketing functions with Abbott Labs Diagnostic Division for over five years. Mr. Nagel received his B.A. and M.B.A. degrees from the University of St. Thomas.

        Deborah Neymark has served as our Vice President of Regulatory Affairs, Clinical Affairs and Quality Systems since October 2000. Mrs. Neymark served as the Corporate Compliance Officer and Vice President of Regulatory Affairs, Clinical Research and Quality Systems for Empi, Inc. from October 1995 to October 2000. From May 1993 to October 1995, Mrs. Neymark was employed as a Regulatory Affairs Manager for Boston Scientific's Scimed division. Prior to May 1993, Mrs. Neymark held regulatory affairs, clinical research and quality assurance positions at Medtronic and Lifecore Biomedical. She received her B.S. in Biology from Valparaiso University.

        James Quackenbush has served as our Vice President of Manufacturing since March 1999. Prior to joining us, Mr. Quackenbush served as Vice President of Manufacturing and Operations with Optical Sensors, Inc., a diagnostic medical device company, where he worked since October 1992. From March 1989 through October 1992, Mr. Quackenbush served as operations manager with Schneider USA’s stent division. Prior to this time, he was an advanced project engineer with the 3M Medical Products Division. Mr. Quackenbush received a B.S. in Industrial Engineering from Iowa State University.

        Gregg Sutton joined us as our Vice President of Research & Development in October 2004. Prior to joining us, Mr. Sutton served as Vice President of Research & Development with AtriTech, Inc., a development stage interventional medical device company since January 2000. From 1998 to 2000, he was Vice President of Research & Development of AngioGuard, Inc., an interventional medical device company that was acquired by Johnson & Johnson in 2000. In 1990 Mr. Sutton co-founded Navarre Biomedical, Inc., a manufacturer of interventional radiology products that was acquired by CR Bard in 1997. Prior to 1990 Mr. Sutton held product engineering positions at St. Jude Medical, Claris Medical and Daig Corporation. Mr. Sutton received a B.S. in Mechanical Engineering from the University of Minnesota.

        James Hennen has served as our Chief Financial Officer since January 2004. Mr. Hennen served as our Controller & Director of Finance from February 2002 through December 2003. Prior to joining us, Mr. Hennen served in accounting positions, most recently as International Controller with WAM!NET, Inc., a globally networked information technology company for media transfer, where he worked since December 1997. From October 1995 through December 1997, Mr. Hennen was a Senior Auditor for Ernst and Young, LLP. Mr. Hennen received a B.S. in Business/Accounting from the University of Minnesota. Mr. Hennen is a Certified Public Accountant.

        There are no family relationships among any of our executive officers.

Available Information

        We make available free of charge on or through our internet website at http://www.vascularsolutions.com our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

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ITEM 2.   PROPERTIES

        Our offices are in approximately 33,000 square feet of leased space in a suburb of Minneapolis, Minnesota. These facilities include approximately 11,200 square feet used for manufacturing activities and approximately 1,400 square feet used for research and laboratory activities, with the remainder used for administrative offices. Our lease for these facilities expires in September 2008. We believe that we may require additional space for our expanding operations before the expiration of this lease. We believe that there is suitable space available in the local market (although not in our current facility) at reasonable rates that are available to us if we need expansion space prior to the end of our lease.

ITEM 3.   LEGAL PROCEEDINGS

        On November 26, 2002, we entered into an agreement that settled all existing intellectual property litigation with Datascope Corporation. Under the terms of the Settlement Agreement, Datascope granted us a non-exclusive license to its Janzen patents as they apply to all current versions of the Duett sealing device, and to certain permitted future product improvements. Datascope also has released us from any claim of patent infringement based on past or future sales of the Duett sealing device. In exchange, we paid Datascope a single lump sum of $3,750,000 in the fourth quarter of 2002.

        On July 12, 2001, we entered into an agreement that settled all existing intellectual property litigation with St. Jude Medical. Under the terms of the settlement agreement, we agreed to pay a royalty of 2.5% of net sales of our Duett sealing device to St. Jude Medical, up to a maximum amount over the remaining life of the St. Jude Fowler patents. In exchange, St. Jude Medical granted to us a non-exclusive license to its Fowler patents and has released us from any claim of patent infringement based on sales of our Duett sealing device. We granted a non-exclusive cross-license to our Gershony patents to St. Jude Medical, subject to a similar royalty payment if St. Jude Medical utilizes our Gershony patents in any future device. Beginning on July 1, 2001, a royalty expense of 2.5% of net sales is included in our cost of goods sold until the maximum royalty is attained.

        On December 11, 2003, we and a non-officer employee of the Company were named as defendants in a lawsuit brought by Diomed, Inc. in the United States District Court for the District of Massachusetts. The complaint alleges that in marketing our Vari-Lase endovenous laser procedure kit we engaged in false advertising and infringed a registered trademark of Diomed. The complaint also alleges that the non-officer employee, who previously worked for a company that conducted business with Diomed, improperly utilized trade secrets of Diomed in developing our Vari-Lase procedure kit. The complaint requests monetary damages and an injunction on the sale of our Vari-Lase procedure kit. We believe that the allegations included in the complaint are wholly without merit, have filed our answer to the complaint, and intend to defend this litigation vigorously. Our insurance carrier has accepted their tender of this claim and is defending this lawsuit. It is not possible to predict the timing or outcome of this litigation, including whether it will affect our ability to sell our Vari-Lase procedure kit, or to estimate the amount or range of potential loss, if any.

        On March 4, 2004, we were named as the defendant in an intellectual property lawsuit brought by Diomed, Inc. in the United States District Court for the District of Massachusetts. The complaint requested a judgment that our Vari-Lase procedure kit and Vari-Lase laser console infringe on a single patent held by Diomed, Inc. and asked for relief in the form of an injunction that would prevent us from selling our Vari-Lase products, compensatory and treble damages caused by the manufacture and sale of our product, and other costs, disbursements and attorneys’ fees. We believe that the allegations included in the complaint are wholly without merit, have filed our answer to the complaint, and intend to defend this litigation vigorously. It is not possible to predict the timing or outcome of this litigation, including whether it will affect our ability to sell our Vari-Lase products, or to estimate the amount or range of potential loss, if any.

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        From time to time we are involved in legal proceedings arising in the normal course of our business. As of the date of this report we are not a party to any legal proceeding not described in this section in which an adverse outcome would reasonably be expected to have a material adverse effect on our results of operations or financial condition.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        No matters were submitted to a vote of security holders during the quarter ended December 31, 2004.

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PART II

ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
                 MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

        Our common stock began trading on the NASDAQ National Market under the symbol “VASC” on July 20, 2000. The following table sets forth, for the periods indicated, the range of high and low last sale prices for the common stock as reported by the NASDAQ National Market.

Holders

        As of December 31, 2004, we had 181 shareholders of record. Such number of record holders does not reflect shareholders who beneficially own common stock in nominee or street name.

Dividends

        We have paid no cash dividends on our common stock, and do not intend to pay cash dividends on our common stock in the future.

ITEM 6.   SELECTED FINANCIAL DATA

        The following selected financial data as of December 31, 2004 and 2003 and for the three years ended December 31, 2004, 2003 and 2002 are derived from, and should be read together with, our financial statements included elsewhere in this Form 10-K. The following selected financial data as of December 31, 2002, 2001 and 2000 and for the fiscal years ended December 31, 2001 and 2000 are derived from financial statements not included herein. The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the Financial Statements and Notes thereto and other financial information included elsewhere in this Form 10-K.

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ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following discussion of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and Notes thereto, and the other financial information included elsewhere in this Form 10-K Report. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains descriptions of the Company’s expectations regarding future trends affecting our business. These forward-looking statements and other forward-looking statements made elsewhere in this document are made in reliance upon safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The following discussion sets forth certain factors we believe could cause actual results to differ materially from those contemplated by the forward looking statements.

Overview

        We are a medical device company focused on bringing solutions to interventional cardiologists and interventional radiologists. As a vertically-integrated medical device company, we generate ideas and create new interventional medical devices, and then deliver those products directly to the physician through our direct domestic sales force and international distribution network. We continue to develop new products and applications for our existing products.

        Since 2003, we have launched four new interventional product categories:

        We  believe these four new recently launched product categories together with sales of our existing Duett, D-Stat Flowable and Acolysis products, will result in continued substantial revenue growth in the range of $35 million to $40 million for 2005. We also believe that these new products will increase our gross margin percent to approximately 71% to 73% during 2005.

Results of Operations

Year ended December 31, 2004 compared to year ended December 31, 2003

        Net sales increased to $22,265,000 for the year ended December 31, 2004 from $11,804,000 for the year ended December 31, 2003. Approximately 89% of our net sales for the year ended December 31, 2004 were to customers in the United States and 11% of the net sales were to customers in international markets. Net sales by product category were as follows:

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        Gross profit as a percentage of net sales increased to 70% for the year ended December 31, 2004 from 61% for the year ended December 31, 2003. Our selling mix continues to change to our higher margin products such as our D-Stat Dry which has gross margins greater than 80% and our Pronto which has gross margins in excess of 75%. We expect gross margins to stabilize in 2005 to approximately 71% to 73%.

        Research and development expenses decreased 7% to $3,401,000 for the year ended December 31, 2004 from $3,671,000 for the year ended December 31, 2003. The decrease was related to less outside project spending in 2004 compared to 2003. We expect our research and development expenses to be approximately $800,000 to $1,000,000 per quarter in 2005 as we continue to pursue additional new products at an expected rate of approximately two new products per year and we continue to move our longer term development projects forward.

        Clinical and regulatory expenses increased 24% to $1,906,000 for the year ended December 31, 2004 from $1,536,000 for the year ended December 31, 2003. The increase was the result of increased clinical study activity, increased FDA fees and increased number of employees compared to 2003. During 2004 our clinical studies consisted of the “Pocket Protector” study for a new indication of our D-Stat Flowable product and the D-Stat Dry study to obtain clinical data to support growing sales of the D-Stat Dry. Clinical and regulatory expenses fluctuate due to the timing of clinical and marketing studies. We expect clinical and regulatory expenses to be approximately $500,000 to $600,000 per quarter in 2005.

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        Sales and marketing expenses increased 18% to $11,360,000 for the year ended December 31, 2004 from $9,646,000 for the year ended December 31, 2003. The increase in sales and marketing expenses is the direct result of our increase in our direct sales force to 57 employees at the end of 2004 compared to 47 as of December 31, 2003. We expect to add approximately 10 field sales employees during 2005 to complete our geographic coverage of the United States. As a result, we expect our sales and marketing expenses to increase to approximately $3,200,000 to $3,500,000 per quarter in 2005.

        General and administrative expenses increased 10% to $2,138,000 for the year ended December 31, 2004 from $1,942,000 for the year ended December 31, 2003. The increase was primarily the result of higher legal fees relating to the Diomed litigation (see “Legal Proceedings” in Item 3 of Part I of this Form 10-K) along with higher business insurance in 2004 compared to 2003. We expect general and administrative expenses to be approximately $550,000 to $650,000 per quarter in 2005.

        Thrombin qualification project expenses were $210,000 for the year ended December 31, 2004 compared to no expenses for the year ended December 31, 2003. We expect the total remaining expenses associated with our qualification of the new source of thrombin to be approximately $3.1 million to be incurred over the next two years, with approximately $1.8 million incurred in 2005 and $1.3 million incurred in 2006.

        Amortization of purchased technology was $218,000 for the year ended December 31, 2004 and $218,000 for the year ended December 31, 2003. The amortization resulted from our acquisition of the Acolysis assets from the secured creditors of Angiosonics, Inc. We allocated $870,000 from the acquisition to purchased technology and are amortizing the amount over four years.

        Interest income decreased to $68,000 for the year ended December 31, 2004 from $150,000 for the year ended December 31, 2003 primarily as a result of lower interest rates and lower cash balances.

Results of Operations

Year ended December 31, 2003 compared to year ended December 31, 2002

        Net sales decreased modestly to $11,804,000 for the year ended December 31, 2003 from $12,101,000 for the year ended December 31, 2002. Approximately 87% of our net sales for the year ended December 31, 2003 were to customers in the United States and 13% of the net sales were to customers in international markets. Net sales by product category were as follows:

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        Gross profit as a percentage of net sales increased to 61% for the year ended December 31, 2003 from 59% for the year ended December 31, 2002. We added higher margin products to our selling mix during 2003, particularly our D-Stat Dry which has gross margins greater than 80%.

        Research and development expenses increased 14% to $3,671,000 for the year ended December 31, 2003 from $3,228,000 for the year ended December 31, 2002. The increase was directly related to our increased activity in launching four new products in 2003 and the continued work on the long term research and development projects. Research and development expenses fluctuate due to outside project spending.

        Clinical and regulatory expenses increased 14% to $1,536,000 for the year ended December 31, 2003 from $1,348,000 for the year ended December 31, 2002. The expected increase was the result of the approval of the four new products in the second half of 2003 as well as the “Pocket Protector” clinical study for a new indication of our D-Stat Flowable product. Clinical and regulatory expenses fluctuate due to the timing of clinical and marketing studies.

        Sales and marketing expenses decreased 19% to $9,646,000 for the year ended December 31, 2003 from $11,964,000 for the year ended December 31, 2002. During 2002 and 2003 we reviewed our sales and marketing expenditures and focused our spending in the areas that drove sales and provided an adequate financial return. As of December 31, 2003, our direct sales force consisted of approximately 40 employees compared to approximately 50 as of December 31, 2002.

        General and administrative expenses decreased 10% to $1,942,000 for the year ended December 31, 2003 from $2,167,000 for the year ended December 31, 2002. The decrease was primarily the result of lower legal fees in 2003 compared to 2002, as we incurred legal fees in 2002 relating to the Datascope litigation which was settled in the fourth quarter of 2002. The reduction in legal fees was partially offset by an increase in the cost of business insurance.

        Legal settlement expenses were $3,750,000 for the year ended December 31, 2002. We entered into an agreement that settled all existing intellectual property litigation with Datascope Corporation in the fourth quarter of 2002 (see “Legal Proceedings” in Item 3 of Part I of this Form 10-K). As part of the settlement, Datascope released us from any claim of patent infringement based on past or future sales of the Duett sealing device. In exchange, we paid Datascope a single lump sum of $3,750,000 in the fourth quarter of 2002.

        Amortization of purchased technology was $218,000 for the year ended December 31, 2003 and $145,000 for the year ended December 31, 2002. The increase is the result of a full year of amortization in 2003 compared to 2002. The amortization resulted from our acquisition of the Acolysis assets from the secured creditors of Angiosonics, Inc. We allocated $870,000 from the acquisition to purchased technology and are amortizing the amount over four years.

        Interest income decreased to $150,000 for the year ended December 31, 2003 from $507,000 for the year ended December 31, 2002 primarily as a result of a reduced cash balance and lower interest rates.

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Income Taxes

        We have not generated any pre-tax income to date and therefore have not paid any federal income taxes since inception in December 1996. No provision or benefit for federal and state income taxes has been recorded for net operating losses incurred in any period since our inception.

        As of December 31, 2004, we had net operating loss carryforwards of approximately $57,865,000 for U.S. federal income tax purposes that begin to expire in the year 2013. As of December 31, 2004, we also had federal and state research and development tax credit carryforwards of approximately $1,598,000 that begin to expire in the year 2013. As of December 31, 2004, we also had a foreign tax loss carryforward of approximately $2,358,000 that do not expire. Under the Tax Reform Act of 1986, the amounts of and benefits from net operating loss carryforwards may be impaired or limited in certain circumstances, including significant changes in ownership interests. Future use of our existing net operating loss carryforwards may be restricted due to changes in ownership or from future tax legislation.

Liquidity and Capital Resources

        We have financed all of our operations since inception through the issuance of equity securities and, to a lesser extent, sales of our products. Through December 31, 2004, we have sold common stock and preferred stock generating aggregate net proceeds of approximately $76.6 million. At December 31, 2004, we had $7,184,000 in cash, cash equivalents and available-for-sale securities on-hand compared to $5,885,000 at December 31, 2003.

        During the year ended December 31, 2004, we used $4,115,000 to fund operating activities. The cash used in operating activities was primarily used to fund our net loss for the period of $3,508,000 and an increase in accounts receivable of $1,723,000, which was offset by depreciation and amortization of $692,000. The increase in accounts receivable is due to the increase in sales of 89% in 2004 from 2003. During 2004 we generated proceeds of $2,120,000 in investing activities, primarily from the net sales of investment securities of $3,020,000, offset by net equipment purchases of $900,000. Also during 2004 we generated $6,212,000 in financing activities, primarily from $5,868,000 we received through the sale of common stock. On March 9, 2004, we sold 888,900 shares of our common stock at an offering price of $6.75 per share through a private placement. Our net proceeds from the offering were approximately $5,594,000.

        During the fourth quarter of 2004, we renewed our credit facility with Silicon Valley Bank and increased the line of credit to $5.0 million. The line of credit has a 12 month term, bears interest at the rate of prime plus 0.5% and is secured by a first security interest on all of our assets. The line of credit includes two covenants: minimum tangible net worth of $11.0 million and a liquidity coverage of not less than 1.25 to 1.00. We were in compliance with these covenants at December 31, 2004. As of December 31, 2004, we had no outstanding balance on the line of credit balance and the availability was $3.1 million.

        We purchase our requirements for thrombin (a component in the Duett and all of the D-Stat products) under a Purchase Agreement dated June 10, 1999 with a subsidiary of King Pharmaceuticals, Inc. The agreement provides for a fixed price, with adjustments based on the supplier’s manufacturing costs and the supplier’s annual percentage increase in the wholesale price of thrombin. The agreement expires on May 29, 2005. During the second and third quarters of 2005, we intend to increase our purchases of thrombin to benefit from the pricing provisions of the agreement, which we expect will increase our inventory of thrombin by approximately $3.0 million. We believe that these purchases will satisfy our thrombin requirements for all of 2005 and 2006.

        On October 18, 2004, we entered into a supply agreement with Sigma-Aldrich Fine Chemicals, an operating division of Sigma-Aldrich, Inc. (Sigma) for the supply of thrombin. Pursuant to the terms of the agreement, we will be paying for certain development costs of Sigma to allow Sigma to produce thrombin. We will pay Sigma $570,000 for its development and qualification costs, $182,000 for capital equipment and $1,725,000 for the first three lots of thrombin. The payments are based on certain milestones over a two year

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period. We do not have any minimum purchase requirements under the contract; however, if we purchase less than three lots of thrombin in any year Sigma will be released from its agreement not to sell thrombin in or as a component of a hemostatic product for medical use, and Sigma will have the right to terminate the contract on 30 days notice.

        The Sigma contract is the start of our plan to fully qualify a new source of thrombin and to bring the new thrombin through the regulatory process by the end of 2006. We expect total estimated expenditures of $6.1 million to complete this project (including the payments to Sigma), with approximately $3.3 million in expenses, $0.3 million in capital equipment purchases and $2.5 million in thrombin inventory purchases. We expect to utilize the thrombin inventory in sales of our hemostatic products starting in 2007.

        We signed a purchase agreement with MedArt Corporation on September 22, 2003 for the manufacture of our Vari-Lase laser console. Under that agreement, we were obligated to purchase laser consoles with an aggregate purchase price of $1,197,000 for our Vari-Lase business during the first year of the agreement, which commenced in December 2003. We fulfilled this obligation during 2004.

        We do not have any other significant cash commitments related to supply agreements, nor do we have any significant commitments for capital expenditures.

        The following table summarizes our contractual cash commitments as of December 31, 2004:

        Principally due to the thrombin inventory purchases and the Sigma thrombin qualification project, we currently anticipate that we will continue to experience a negative cash flow until at least the fourth quarter of 2005, at which time we project that we will become cash flow neutral. We currently believe that our working capital of $11.8 million, anticipated cash from product sales and, if needed, our $5.0 million credit facility with Silicon Valley Bank will be sufficient to meet our operating and capital requirements until we reach cash flow neutral in the fourth quarter of 2005. However, our actual liquidity and capital requirements will depend upon numerous factors, including the costs and timing of expansion of sales and marketing activities; the amount of revenues from sales of our existing and new products; the cost of maintaining, enforcing and defending patents and other intellectual property rights; competing technological and market developments; developments related to regulatory and third party reimbursement matters; the cost and progress of our research and development efforts; the cost and progress or our thrombin qualification efforts; and other factors.

        In the event that additional financing is needed and depending on market conditions, we may seek to raise additional funds for working capital purposes at any time through the sale of equity or debt securities. If cash generated from operations is insufficient to satisfy our cash needs, we may be required to raise additional funds. We currently have no commitments for additional funding and so our ability to meet our long-term liquidity needs is uncertain. If we raise additional funds through the issuance of equity securities, our shareholders may experience significant dilution. Furthermore, additional financing may not be available when needed or, if available, financing may not be on terms favorable to us or our shareholders. If financing is not available when required or is not available on acceptable terms, we may be unable to develop or market our products or take advantage of business opportunities or may be required to significantly curtail our business operations.

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Critical Accounting Policies

        Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate these estimates and judgments. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

        Our accounting policies are described in Note 2 to the financial statements. We set forth below those material accounting policies that we believe are the most critical to an investor’s understanding of our financial results and condition, and require complex management judgment.

Inventory

        We state our inventory at the lower of cost (first-in, first-out method) or market. The estimated value of excess, obsolete and slow-moving inventory as well as inventory with a carrying value in excess of its net realizable value is established by us on a quarterly basis through review of inventory on hand and assessment of future demand, anticipated release of new products into the market, historical experience and product expiration. Our stated value of inventory could be materially different if demand for our products decreased because of competitive conditions or market acceptance, or if products become obsolete because of advancements in the industry.

Revenue Recognition

        We recognize revenue in accordance with generally accepted accounting principles as outlined in the SEC’s Staff Accounting Bulletin No. 104 “Revenue Recognition,” which requires that four basic criteria be met before revenue can be recognized: (i) persuasive evidence of an arrangement exists; (ii) the price is fixed or determinable; (iii) collectibility is reasonably assured; and (iv) product delivery has occurred or services have been rendered. We recognize revenue as products are shipped based on FOB shipping point terms when title passes to customers. We negotiate credit terms on a customer-by-customer basis and products are shipped at an agreed upon price. All product returns must be pre-approved and, if approved, customers are subject to a 20% restocking charge.

        We analyze the rate of historical returns when evaluating the adequacy of the allowance for sales returns, which is included with the allowance for doubtful accounts on our balance sheet. At December 31, 2004, this reserve was $20,000 compared to $20,000 at December 31, 2003. If the historical data we use to calculate these estimates does not properly reflect future returns, revenue could be overstated.

Allowance for Doubtful Accounts

        We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. This allowance is regularly evaluated by us for adequacy by taking into consideration factors such as past experience, credit quality of the customer base, age of the receivable balances, both individually and in the aggregate, and current economic conditions that may affect a customer’s ability to pay. At December 31, 2004, this reserve was $160,000 compared to $140,000 at December 31, 2003. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

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Warranty Costs

        We provide a warranty for certain products against defects in material and workmanship for periods of up to 24 months. We record a liability for warranty claims at the time of sale. The amount of the liability is based on the amount we are charged by our original equipment manufacturer to cover the warranty period. The original equipment manufacturer includes a year warranty with each product sold to us. We record a liability for the uncovered warranty period offered to a customer, provided the warranty period offered exceeds the initial one year warranty period covered by the original equipment manufacturer. At December 31, 2004, this warranty provision was $33,000 compared to $0 at December 31, 2003. If the assumptions used in calculating the provision were to materially change, resulting in more defects than anticipated, an additional provision may be required.

Income Taxes

        The carrying value of our net deferred tax assets assumes that we will be able to generate sufficient taxable income in the United States and to a lesser extent Germany, based on estimates and assumptions. We record a valuation allowance to reduce the carrying value of our net deferred tax asset to the amount that is more likely than not to be realized. For the year ended December 31, 2004, we recorded a $26.4 million valuation allowance related to our net deferred tax assets of $26.4 million. In the event we were to determine that we would be able to realize our deferred tax assets in the future, an adjustment to the deferred tax asset would increase net income in the period such determination is made. On a quarterly basis, we evaluate the realizability of our deferred tax assets and assess the requirement for a valuation allowance.

New Accounting Pronouncements

        In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123R, “Share-Based Payment” (SFAS 123R), which requires companies to measure and recognize compensation expense for all stock-based payments at fair value.  SFAS 123R is effective for all interim periods beginning after June 15, 2005.  Early adoption is encouraged and retroactive application of the provisions of SFAS 123R to the beginning of the fiscal year that includes the effective date is permitted, but not required.  We are currently evaluating the impact of SFAS 123R our financial position and results of operations.  See Note 2 for information related to the pro forma effects on our reported net loss and net loss per share of applying the fair value recognition provisions of the previous Statement of Financial Accounting Standards (SFAS) 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.

Risk Factors

        The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of the following risks occur, our business, financial condition or results of operations could be seriously harmed.

We will not be successful if the interventional medical device community does not adopt our new products

        During the third quarter of 2000 we commenced sales of our first product, the Duett sealing device, in the United States, which we believe represents the largest market for interventional medical devices. We have not become profitable with our sales of the Duett. In the second half of 2003, we received clearance to commence sales of four new interventional products in the United States. Our success will depend on the medical community’s acceptance of our new products. We cannot predict how quickly, if at all, the medical community will accept our new products, or, if accepted, the extent of their use. Our potential customers must:

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        Because we have only limited experience with sales of our D-Stat Dry hemostatic bandage, Pronto extraction catheter, Vari-Lase endovenous laser and Langston catheter products, we have no ability to predict the level of sales of these products. If we encounter difficulties in growing our sales of our new medical devices in the United States, our business will be seriously harmed.

We have limited working capital to pursue our business

        On December 31, 2004, we had $7.2 million in cash, cash equivalents and marketable securities and a working capital of $11.8 million. During 2004, our operating activities resulted in the use of $4.1 million of cash. There can be no assurance that our existing working capital will be sufficient to satisfy our working capital needs. If our sales do not increase, or if we encounter unexpected expenses, we will need to raise additional working capital. We have no commitments for additional funding and so our ability to meet our long-term liquidity needs is uncertain. If we raise additional funds through the issuance of equity securities, our shareholders may experience significant dilution. Furthermore, additional financing may not be available when needed or, if available, financing may not be on terms favorable to us or our shareholders. If financing is not available when required or is not available on acceptable terms, we may be unable to develop or market our products or unable to take advantage of business opportunities, or we may be required to significantly curtail our business operations.

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

        Since we commenced operations in February 1997, we have incurred net losses primarily from costs relating to the development and commercialization of our Duett sealing device and new products. At December 31, 2004, we had an accumulated deficit of $63.2 million. We expect to continue to significantly invest in our sales and marketing, and research and development activities. Because of our plans to introduce new products and expand our commercialization, we expect to incur net losses through at least the first quarter of 2005. Our business strategies may not be successful, and we may not become profitable in any future period or at all. If we do become profitable, we cannot be certain that we can sustain or increase profitability on a quarterly or annual basis.

We may face additional intellectual property claims in the future which could prevent us from manufacturing and selling our products or result in our incurring substantial costs and liabilities

        The interventional medical device industry is characterized by numerous patent filings and frequent and substantial intellectual property litigation. Companies in the interventional medical device industry have employed intellectual property litigation in an attempt to gain a competitive advantage. We have been subject to two intellectual property lawsuits concerning our Duett sealing device. Although we have settled both of these intellectual property lawsuits, it is possible that additional claims relating to the Duett could be brought in the future. We also are the subject of two intellectual property lawsuits concerning our Vari-Lase products. In addition, while we do not believe that any of our new products infringes any existing patent, it is highly likely that we will become subject to intellectual property claims with respect to our new products in the future. Intellectual property litigation in recent years has proven to be very complex, and the outcome of such litigation is difficult to predict.

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        An adverse determination in any intellectual property litigation or interference proceedings could prohibit us from selling a product, subject us to significant liabilities to third parties or require us to seek licenses from third parties. The costs associated with these license arrangements may be substantial and could include ongoing royalties. Furthermore, the necessary licenses may not be available to us on satisfactory terms, if at all. Adverse determinations in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing and selling a product.

        Our defense of intellectual property claims filed in the future, regardless of the merits of the complaint, could divert the attention of our technical and management personnel away from the development and marketing of our products for significant periods of time. The costs incurred to future claims could be substantial and seriously harm us, even if our defense is ultimately successful.

The loss of, or interruption of supply from, key vendors, including our single source supplier of thrombin, could limit our ability to manufacture our products

        We purchase components used in our products from various suppliers and rely on a single source for the thrombin component of our Duett sealing device and D-Stat products. There are currently no FDA-approved alternative suppliers of thrombin. Our current supply agreement with our thrombin vendor terminates in May 2005. Because it requires FDA approval, establishing our new supplier for thrombin requires a lead-time of at least two years and involves significant additional costs. The failure by us to complete our thrombin qualification project on time and on budget, or the loss of any other key vendor, may limit our ability to manufacture our Duett, D-Stat Flowable and D-Stat Dry products and could therefore seriously harm our business.

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

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

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

The market for interventional medical devices is highly competitive and will likely become more competitive, and our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements that may render our products obsolete

        The existing market for interventional medical devices is intensely competitive. We expect competition to increase further as companies develop new products and/or modify their existing products to compete directly with ours. The primary competitors for our Duett sealing device are Abbott Laboratories (through its subsidiary Abbott Vascular), Datascope Corp. and St. Jude Medical, Inc., which sells a product developed by Kensey Nash Corporation. Each of our new products encounters competition from at least several medical device companies, including Medtronic Inc. Each of these companies has:

        We may not be able to effectively compete with these companies. In addition, broad product lines may allow our competitors to negotiate exclusive, long-term supply contracts and offer comprehensive pricing for their products. Broader product lines may also provide our competitors with a significant advantage in marketing competing products to group purchasing organizations and other managed care organizations that are increasingly seeking to reduce costs through centralized purchasing. Greater financial resources and product development capabilities may allow our competitors to respond more quickly to new or emerging technologies and changes in customer requirements that may render our products obsolete.

Our international sales are subject to a number of risks that could seriously harm our ability to successfully commercialize our products in any international market

        Our international sales are subject to several risks, including:

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        The occurrence of any of these events could seriously harm our future international sales and our ability to successfully commercialize our products in any international market.

We have limited manufacturing experience and may encounter difficulties in our manufacturing operations which could seriously harm our business

        We have limited experience in manufacturing our products. In particular, we have very limited experience in lyophilization, which is a key manufacturing step for our D-Stat Dry hemostatic bandage. We believe our facilities are adequate for our projected production of our products for the foreseeable future, but future facility requirements will depend largely on future sales of our products in the United States. We may encounter unforeseen difficulties in expanding our production of our new products, including problems involving production yields, quality control and assurance, component supply and shortages of qualified personnel, compliance with FDA regulations and requirements regarding good manufacturing practices, and the need for further regulatory approval of new manufacturing processes. Difficulties encountered by us in expanding and maintaining our manufacturing capabilities could seriously harm our business.

Our business and results of operations may be seriously harmed by changes in third-party reimbursement policies

        We could be seriously harmed by changes in reimbursement policies of governmental or private healthcare payors, particularly to the extent any changes affect reimbursement for catheterization procedures in which our products are used. Failure by physicians, hospitals and other users of our products to obtain sufficient reimbursement from healthcare payors for procedures in which our products are used or adverse changes in governmental and private third-party payors’ policies toward reimbursement for such procedures would seriously harm our business.

        In the United States, healthcare providers, including hospitals and clinics that purchase medical devices such as our products, generally rely on third-party payors, principally federal Medicare, state Medicaid and private health insurance plans, to reimburse all or part of the cost of catheterization procedures. Any changes in this reimbursement system could seriously harm our business.

        In international markets, acceptance of our products is dependent in part upon the availability of reimbursement within prevailing healthcare payment systems. Reimbursement and healthcare payment systems in international markets vary significantly by country. Our failure to receive international reimbursement approvals could have a negative impact on market acceptance of our products in the markets in which these approvals are sought.

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

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

        Compliance with the regulations of these agencies may delay or prevent us from introducing any new model of our existing products or other new products. Furthermore, we may be subject to sanctions, including temporary or permanent suspension of operations, product recalls and marketing restrictions if we fail to comply with the laws and regulations pertaining to our business.

        We are also required to demonstrate compliance with the FDA’s quality system regulations. The FDA enforces its quality system regulations through pre-approval and periodic post-approval inspections. These regulations relate to product testing, vendor qualification, design control and quality assurance, as well as the maintenance of records and documentation. If we are unable to conform to these regulations, the FDA may take actions which could seriously harm our business. In addition, government regulation may be established that could prevent, delay, modify or rescind regulatory clearance or approval of our products.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, available-for-sale securities and accounts receivables. We maintain our accounts for cash and cash equivalents and available-for-sale securities principally at one major bank and one investment firm in the United States. We have a formal written investment policy that restricts the placement of investments to issuers evaluated as creditworthy. We have not experienced any losses on our deposits of our cash and cash equivalents.

        With respect to accounts receivable, we perform credit evaluations of our customers and do not require collateral. There have been no material losses on accounts receivables.

        In the United States and Germany, we sell our products directly to hospitals and clinics in the local currency.

        In all other international markets, we sell our products to independent distributors who, in turn, sell to medical clinics. We sell our product in these countries through independent distributors denominated in United States dollars. Loss, termination or ineffectiveness of distributors to effectively promote our product would have a material adverse effect on our financial condition and results of operations.

        We do not believe our operations are currently subject to significant market risks for interest rates, foreign currency exchange rates, commodity prices or other relevant market price risks of a material nature.

        We do not have any indebtedness as of December 31, 2004. If we were to borrow from our revolving credit agreement, we would be exposed to changes in interest rates. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes.

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ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The Consolidated Financial Statements and Notes thereto required pursuant to this Item begin on page 38 of this Annual Report on Form 10-K.

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

        No additional disclosure is required regarding our recent change in independent accountants, as disclosed in our Form 8-K filed on October 1, 2004 and Form 8-K/A filed on October 22, 2004.

ITEM 9A.   CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures.

        Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act of 19934 (the “Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in timely alerting them to the material information relating to us (or our consolidated subsidiaries) required to be included in the reports we file or submit under the Exchange Act.

Changes in internal controls.

        During the fiscal quarter ended December 31, 2004, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting.

        Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

        Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2004.

        Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by Virchow, Krause & Company, LLP, an independent registered public accounting firm, as stated in their report which is included herein on page 42.

ITEM 9B.   OTHER INFORMATION

        No information was required to be disclosed in a report on Form 8-K in the fourth quarter that was not so disclosed.

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PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        Incorporated herein by reference to the Sections under the headings “Election of Directors,” “Committees of the Board of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” contained in the Proxy Statement for our Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days of the close of the year ended December 31, 2004.

        See Item 1 of Part I hereof for information regarding our executive officers.

        We have adopted a code of ethics that applies to all of our directors, officers (including our chief executive officer, chief financial officer, chief accounting officer, and any person performing similar functions) and employees. We have made our Code of Ethics available by filing it as Exhibit 14 with our 2003 Annual Report on Form 10-K.

ITEM 11.   EXECUTIVE COMPENSATION

        Incorporated herein by reference to the Sections under the headings “Director Compensation” and “Executive Compensation and Other Information” contained in the Proxy Statement for our Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days of the close of the year ended December 31, 2004.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

        Incorporated herein by reference to the Section under the heading “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” contained in the Proxy Statement for our Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days of the close of the year ended December 31, 2004.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        None.

ITEM 14.   PRINCIPAL ACCOUNTING FEES AND SERVICES

        Incorporated herein by reference to the Section under the heading “Additional Information about our Independent Auditor” contained in the Proxy Statement for our Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days of the close of the year ended December 31, 2004.

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PART IV

ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

        Schedule II – Valuation and Qualifying Accounts. Such schedule should be read in conjunction with the consolidated financial statements. All other supplemental schedules are omitted because of the absence of conditions under which they are required.

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35

_________________

* Management contract or compensatory plan or arrangement required to be filed as an Exhibit to this Form 10-K.

** Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions of these exhibits have been deleted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.

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SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 4th day of February 2005.

        KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Howard Root and James Hennen (with full power to act alone), as his or her true and lawful attorneys-in-fact and agents, with full powers of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to the Annual Report on Form 10-K of Vascular Solutions, Inc., and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, lawfully do or cause to be done by virtue hereof.

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on the 4th day of February, 2005, by the following persons in the capacities indicated.

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SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Vascular Solutions, Inc.

We have audited the accompanying consolidated balance sheet of Vascular Solutions, Inc. as of December 31, 2004, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for the year ended December 31, 2004. These consolidated financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vascular Solutions, Inc. as of December 31, 2004 and the results of their operations and their cash flows for the year ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

Minneapolis, Minnesota
January 21, 2005

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Vascular Solutions, Inc.

We have audited the consolidated balance sheet of Vascular Solutions, Inc. as of December 31, 2003, and the related statements of operations, changes in shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Vascular Solutions, Inc. at December 31, 2003, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2003, in conformity with U.S. generally accepted accounting principles.

Minneapolis, Minnesota
January 16, 2004

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Vascular Solutions, Inc.

Under date of January 21, 2005, we reported on the consolidated balance sheet of Vascular Solutions, Inc. as of December 31, 2004, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for the year ended December 31, 2004, as contained in the annual report on Form 10-K for the year ended December 31, 2004. In connection with our audit of the aforementioned consolidated financial statements, we have also audited the related financial statement schedule as listed in the accompanying index. This financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on this financial statement schedule based on our audit.

In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

Minneapolis, Minnesota
January 21, 2005

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Vascular Solutions, Inc.

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that Vascular Solutions, Inc. (the “Company”) maintained effective internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Vascular Solutions, Inc.‘s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) 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 (3) 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.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

In our opinion, management’s assessment that Vascular Solutions, Inc. maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also in our opinion, Vascular Solutions, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated balance sheet of Vascular Solutions, Inc. as of December 31, 2004 and the related consolidated statements of operations, changes in shareholder’s equity and cash flows for the year ended December 31, 2004, and our report dated January 21, 2005, expresses an unqualified opinion on those consolidated financial statements.

Minneapolis, Minnesota
January 21, 2005

42

Vascular Solutions, Inc.

Consolidated Balance Sheets

See accompanying notes

43

Vascular Solutions, Inc.

Consolidated Statements of Operations

See accompanying notes

44

Vascular Solutions, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

See accompanying notes.

45

Vascular Solutions, Inc.

Consolidated Statements of Cash Flows

See accompanying notes.

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1.   Description of Business

Vascular Solutions, Inc. (the Company) is a medical device company focused on bringing solutions to interventional cardiologists and interventional radiologists. The Company’s current principle product lines consist of the following medical devices:

As a vertically-integrated medical device company, the Company generates ideas and creates new interventional medical devices, and then delivers the products directly to the physician through their direct domestic sales force and their international distribution network. The Company was incorporated in the state of Minnesota in December 1996 and began operations in February 1997.

2.   Summary of Significant Accounting Policies

Basis of Consolidation

The consolidated financial statements include the accounts of Vascular Solutions, Inc. and its wholly owned subsidiary, Vascular Solutions GmbH, after elimination of intercompany accounts and transactions.

Segment Reporting

A business segment is a distinguishable component of an enterprise that is engaged in providing an individual product or service or a group of related products or services and that is subject to risks and returns that are different from those of other business segments. The Company’s segments have similar economic characteristics and are similar in the nature of the products sold, type of customers, methods used to distribute the Company’s products and regulatory environment.  Management believes that the Company meets the criteria for aggregating its operating segments into a single reporting segment.

Foreign Currency Translation and Transactions

Foreign assets and liabilities are translated using the year-end exchange rates. Results of operations are translated using the average exchange rates throughout the year. Translation gains or losses are accumulated as a separate component of shareholders’ equity.

Comprehensive Loss

The components of comprehensive loss are net loss and the effects of foreign currency translation adjustments. The accumulated other comprehensive income for the foreign currency translation adjustment at December 31, 2004 and 2003 was $143,660 and $42,052, respectively.

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2.   Summary of Significant Accounting Policies (continued)

Fair Value of Financial Instruments

The carrying amount for cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximates fair value due to the immediate or short-term maturity of these financial instruments. 

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company classifies all highly liquid investments with initial maturities of three months or less as cash equivalents. Cash equivalents consist of cash and money market funds and are stated at cost, which approximates market value. The Company deposits its cash in high quality financial institutions. The balances, at times may exceed federally insured limits.

Credit risk and allowance for doubtful accounts

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. This allowance is regularly evaluated by the Company for adequacy by taking into consideration factors such as past experience, credit quality of the customer base, age of the receivable balances, both individually and in the aggregate, and current economic conditions that may affect a customer’s ability to pay. Accounts receivable over 60 days past due are considered past due. The Company does not accrue interest on past due accounts receivable. Receivables are written off only after all collection attempts have failed and are based on individual credit evaluation and the specific circumstances of the customer. At December 31, 2004 and 2003, the allowance for doubtful accounts was $160,000 and $140,000, respectively.

All product returns must be pre-approved and, if approved, customers are subject to a 20% restocking charge. The Company analyzes the rate of historical returns when evaluating the adequacy of the allowance for sales returns, which is included with the allowance for doubtful accounts on our balance sheet. At December 31, 2004 and 2003, the sales and return allowance was $20,000 and $20,000, respectively.

Accounts receivable are shown net of the combined total of the allowance for doubtful accounts and allowance for sales returns of $180,000 and $160,000 at December 31, 2004 and 2003, respectively.

Available-for-Sale Securities

The Company classifies investments as available-for-sale securities. Available-for-sale securities consist of U.S. government obligations and investment-grade corporate debt with maturities of up to one year. These investments are stated at amortized cost, which approximates market value. There were no material realized gains or losses on the sales of available-for-sale securities during the years ended December 31, 2004, 2003 and 2002.  For purposes of determining gross realized gains or losses, the cost of available-for-sale securities is based on specific identification.

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2.   Summary of Significant Accounting Policies (continued)

At December 31, 2004 and 2003, the Company had the following available for sale securities with carrying values equal to fair values:

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or market. Appropriate consideration is given to deterioration, obsolescence and other factors in evaluating net realizable value. Inventories are comprised of the following at December 31:

Property and Equipment

Property and equipment are stated at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets as follows:

Impairment of Long-Lived Assets

The Company will record impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. The amount of impairment loss recorded will be measured as the amount by which the carrying value of the assets exceeds the fair value of the assets. To date, the Company has determined that no impairment of long-lived assets exists.

Revenue Recognition

In the United States and Germany, the Company sells its products directly to hospitals and clinics. Revenue is recognized in accordance with generally accepted accounting principles as outlined in the SEC’s Staff Accounting Bulletin No. 104 “Revenue Recognition,” which requires that four basic criteria be met before revenue can be recognized: (i) persuasive evidence of an arrangement exists; (ii) the price is fixed or determinable; (iii) collectibility is reasonably assured; and (iv) product delivery has occurred or services have been rendered. The Company recognizes revenue as products are shipped based on FOB shipping point terms when title passes to customers. The Company negotiates credit terms on a customer-by-customer basis and products are shipped at an

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2.   Summary of Significant Accounting Policies (continued)

agreed upon price. All product returns must be pre-approved and, if approved, customers are subject to a 20% restocking charge.

In all other international markets, the Company sells its products to international distributors which subsequently resell the products to hospitals and clinics. The Company has agreements with each of its distributors which provide that title and risk of loss pass to the distributor upon shipment of the products to the distributor. The Company warrants that its products are free from manufacturing defects at the time of shipment to the distributor. Revenue is recognized upon shipment of products to distributors following the receipt and acceptance of a distributor’s purchase order. Allowances are provided for estimated returns and warranty costs at the time of shipment.

Shipping and handling costs

In accordance with the Emerging Issues Task Force (EITF) issue 00-10, “Accounting for Shipping and Handling Fees and Costs,” the Company includes shipping and handling revenues in net sales and shipping and handling costs in cost of sales.

Research and Development Costs

All research and development costs are charged to operations as incurred.

Warranty Costs

Effective during the year ended December 31, 2004, certain of the Company’s products are covered by warranties against defects in material and workmanship for periods of up to 24 months. The Company records a liability for warranty claims at the time of sale. The amount of the liability is based on the amount the Company is charged from their original equipment manufacturer to cover the warranty period. The original equipment manufacturer includes a year warranty with each product sold to the Company. The Company records a liability for the uncovered warranty period offered to a customer, provided the warranty period offered exceeds the initial one year warranty period covered by the original equipment manufacturer.

Warranty provisions and claims for the year ended December 31, 2004, were as follows:

Stock-Based Compensation

At December 31, 2004, the Company had a stock-based employee compensation plan, which is described more fully in Note 10. The Company accounts for the plan under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is reflected in net loss, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, to stock-based employer compensation.

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2.   Summary of Significant Accounting Policies (continued)