SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 FORM 10-K /X/ 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000 /  /  TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___ to ___ Commission File Number 0-22229
__________________________________________________ VITAL IMAGES, INC.(Exact name of
Registrant as specified in its charter) Minnesota(State or
  other jurisdiction of
  incorporation or organization)
  42-1321776(I.R.S. Employer Identification No.)3300 Fernbrook Lane, N., Suite 200
  Plymouth, Minnesota(Address of principal
  executive offices)
  55447(Zip Code) (763)
852-4100(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, $.01 par value
Preferred Stock Purchase Rights
_________________________________________________  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 the
Form 10-K.  ____ The aggregate
market value of the voting stock held by non-affiliates of the registrant as of
February 28, 2001 was $24,191,000. The number of shares outstanding of the issuer's
classes of common stock as of February 28, 2001: Common stock, $.01 Par Value 
6,822,973. DOCUMENTS INCORPORATED BY REFERENCE Portions of
registrant's definitive Proxy Statement in connection with the Annual Meeting
of Shareholders to be held May 10, 2001 (2001 Proxy Statement) are
incorporated by reference into Part III. VITAL
IMAGES,
INC.
FORM 10-K

TABLE OF
CONTENTS

PART I

Item 1.
  BusinessItem 2.
  PropertiesItem 3.
  Legal ProceedingsItem 4.
  Submission of Matters to a Vote of Security
  HoldersPART II

Item 5.
  Market for Registrant's Common Equity and
  Related Stockholder MattersItem 6.
  Selected Financial DataItem 7.
  Management's Discussion and Analysis of
  Financial Condition and Results of OperationsItem 8.
  Financial Statements and Supplementary DataItem 9.
  Changes in and Disagreements with
  Accountants onAccounting and Financial DisclosurePART
III

Item 10.
  Directors and Executive Officers of the
  RegistrantItem 11.
  Executive CompensationItem 12.
  Security Ownership of Certain Beneficial
  Owners and ManagementItem 13.
  Certain Relationships and Related
  TransactionsPART IV

Item 14.
  Exhibits, Financial Statement Schedules and
  Reports on Form 8-KSignaturesFORWARD-LOOKING
STATEMENTS

This Annual Report on Form 10-K contains
certain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995.  For this
purpose, any statements contained in this Form 10-K that are not statements of
historical fact may be deemed to be forward-looking statements.  Without limiting the foregoing, words such
as "may," "will," "expect," "believe,"
"anticipate," "estimate," or "continue" or the
negative or other variations thereof or comparable terminology are intended to
identify forward-looking statements. 
These statements by their nature involve substantial risks and
uncertainties, and actual results may differ materially depending on a variety
of factors, including those set forth in the section below entitled
"Important Factors."

Item 1.BUSINESS

Vital
Images, Inc. (Vital Images or the Company) was incorporated in Iowa in
September 1988.  In March 1997, the
Company re-incorporated under the laws of the state of Minnesota.  The Companys principal executive offices
are located at 3300 Fernbrook Lane N., Suite 200, Plymouth, MN 55447 (telephone
(763) 852-4100, facsimile (763) 852-4110, e-mail  info@vitalimages.com ).  From May 24, 1994 through May 11, 1997, the
Company was a wholly-owned subsidiary of Bio-Vascular, Inc. (Bio-Vascular).

Business Description

Vital
Images develops, markets and supports 3D medical imaging software for use
primarily in disease screening, clinical diagnosis and therapy planning.  The Companys software applies proprietary computer
graphics and image processing technologies to a wide variety of data supplied
by computed tomography (CT) scanners, magnetic resonance (MR) imaging
devices and ultrasound scanning equipment. 
Vital Images products allow clinicians to create both two- and
three-dimensional views of human anatomy and to non-invasively navigate within
these images to better visualize and understand internal structures and
pathologies.  The Company believes that
its high-speed visualization technology and customized protocols
cost-effectively bring 3D visualization and analysis into the routine,
day-to-day practice of medicine.

Vitrea®, Vital
Images advanced 3D medical imaging product for radiological and surgical
applications, received FDA clearance in November 1996 and was released for sale
in October 1997.  Due to its speed and
ease-of-use, management believes that Vitrea
was the first 3D medical imaging product with the ability to appeal primarily
to the clinical market.  Historically,
3D medical imaging software was slow, difficult to use, and operated only on
expensive workstations.  Consequently,
the functionality of such software was appealing only for research
applications.  The Companys Vitrea software combined speed with
ease-of-use to enable a physician to access, manipulate and analyze 3D images,
typically in less than five minutes.  In
February 2001, the Company released Vitrea
2 Version 2.2, which included significant enhancements for colon imaging and
evaluation, as well as new automated features for tumor volume measurement and
2D comparative review. The Company offers Vitrea
2 primarily as an integrated software and hardware system, consisting of Vitrea 2 software installed on a computer
workstation.  To date, the Company has
licensed approximately 340 copies of Vitrea
and Vitrea 2 to hospitals,
clinics, imaging centers and other sites, including ten of the nations top
fifteen hospitals.

The
Company believes that growing acceptance of 3D medical imaging offers Vital
Images numerous market expansion opportunities.  Research and development efforts are currently focused on using
the Companys base of visualization technology to expand to other imaging
modalities, such as x-ray angiography, as well as expanding the features and
functions in the current modalities. 
Vital Images is also developing 3D medical imaging software tools for
non-invasive screening applications, such as CT colonography for colon cancer
screening, surgical planning, intra-operative visualization and real-time
interventional 3D visualization.

The global market for 3D medical imaging
is largely unpenetrated and growing rapidly. 
Today, only a small percentage of hospitals, clinics and imaging centers
have purchased 3D medical imaging products for use in diagnostic imaging.  Recent technological
advances in both computer hardware and software development have dramatically
improved the cost-to-performance ratio, bringing the prices for 3D medical
imaging products into the reach of most healthcare providers.  In addition, increasing clinical awareness
and improving utility of applications, among other factors, are also driving
demand for 3D medical imaging products. 
Based on an increasing number of 3D procedures being performed as a
result of growing use of imaging technology, new 3D screening procedures, and
broader acceptance of 3D applications, Vital Images estimates that the
potential worldwide market for 3D medical imaging software and workstations
will grow to more than $2 billion within the next six years.

Technology

The
two core technologies underlying the Companys products are customized
protocols which make Vitrea 2 simple to use and a visualization
technique known as volume rendering. 
A feature critical to Vitrea 2s speed and ease-of-use are its
customized protocols, which provide automated 2D and 3D renderings of scanner
data, optimized for individual clinical applications.  Vital Images engineers and clinical collaborators have selected
specific views for each type of exam Vitrea 2 supports, in order to provide
immediate, useful 2D and 3D views for the user.  After the selected patient data has been retrieved, Vitrea 2
provides the clinician with six views with all visualization parameters pre-set
for the specific type of clinical exam. 
The visualization settings for these views are stored in Vitrea 2s
software and are automatically and adaptively applied to each patient study,
optimizing the views displayed.  By
applying this proprietary protocol technique, the system anticipates the
clinicians needs and provides immediately useful views of the patient
data.  The use of customized protocols
automates the complex and time-consuming approaches inherent in many competing
3D medical imaging products and eliminates the need for the user to be
proficient in operating complex graphics programs.  The Company has been issued Patent No. 5,986,662 from the U.S.
Patent and Trademark Office for its mechanism for automated protocol selection.

Volume
rendering is an advanced technique for displaying two- or three-dimensional
views on a computer monitor that the Company believes has significant
advantages over the alternative technique, known as surface rendering.  Volume rendering permits the direct display
of all of the imaging data without mathematical modeling and allows interactive
control of the level of transparency of the data.  By comparison, surface rendering requires the creation of
artificial surfaces based on selected imaging data, and the usefulness of the
resulting visual image is largely dependent on where these surfaces are set
by the clinical technician.  Volume
rendering is not dependent on the creation of artificial surfaces and allows
visualization of varying components that might otherwise be eliminated from a
surface rendered image due to surface approximation.  Because volume rendering uses all of the data and information
collected by the imaging equipment, the Company believes visualization
processes that use volume rendering provide clinicians with better images to define
and display pathology and anatomy in a more useful manner.

Until
recently, medical imaging companies largely overlooked volume rendering because
the computer power necessary to perform volume rendering was significantly more
expensive and intensive than the requirements for surface rendering.  The Companys experience with volume
rendering has its basis in the efforts of Vincent J. Argiro, Ph.D., the founder
of the Company, who developed three-dimensional visualization software using
volume rendering as an aid in his research in developmental neuroscience.  Dr. Argiro focused on accelerating the
performance of volume rendering on standard computer platforms.  As a result of his work, he developed
expertise in accelerated volume rendering, which forms the core of the
Companys volume rendering technology. 
Because the performance of standard computer platforms has increased
while the relative cost of such performance has decreased, the Company believes
that volume rendering has become a more accessible imaging solution for routine
clinical applications.

The
Company believes the combination of customized protocols and accelerated volume
rendering offered by Vitrea 2, together with improved computer
performance, allows it to deliver a simple, fast and affordable 3D medical
imaging product.



Industry
Background

Medical
practices in the areas of diagnostic imaging, surgery and cancer treatment have
changed dramatically over the past 20 years, due in part to the introduction of
a variety of new imaging, visualization, analysis, computer, networking, catheter
and navigation technologies.  The result
has been the rapid adoption and increased use of CT, MR and ultrasound devices,
and the incorporation of new physician-care practices based on the imaging
information provided by these devices.

Each
of these imaging technologies captures data that provides a physician with a
graphical representation of the inside of the human body.  These images have traditionally been viewed
as a series of two-dimensional, cross-sectional slices on x-ray-type film.  As computer processing speed increased,
software performance improved and networking technologies developed,
manufacturers of scanning equipment began offering integrated systems that
allowed clinicians to view, analyze and manipulate these medical images in a digital
environment.  These systems first
visualized individual slices, or pictures, on a computer monitor and later
provided views of multiple slices.  More
recently, medical imaging systems began to permit viewing and manipulation of
large, multiple slice data sets as a single, three-dimensional image on a
computer workstation.  Today, the 3D
medical imaging industry involves the creation, visualization, manipulation,
analysis and communication of medical images in two and three dimensions.

The
3D medical imaging industry and the markets for 3D medical imaging products
have historically lagged the market for imaging devices due to the lack of
industry standards for the generation, transmission and storage of medical
imaging data and due to computer costs and performance considerations.  Over the past several years, a number of
technical and cost barriers to growth in the 3D medical imaging industry and
the picture archive and communication systems (PACS) industry have begun to
erode.  In particular, the medical
industry has embraced an image transmission and archiving standard called
DICOM, promulgated by the American College of Radiology and the National
Electronic Manufacturers Association. 
This standard permits imaging, visualization, networking and archiving
systems from different vendors to work cooperatively within a single
network.  In addition, the
cost-to-performance ratio of computer products used in visualization and PACS
has improved dramatically, bringing the prices for 3D medical imaging capabilities
and PACS within the grasp of most healthcare providers.  The Company believes that the increasing
acceptance of industry standards such as DICOM and the improvements in the
cost-to-performance ratio for clinical workstations will support continued market
growth in the 3D medical imaging and PACS industries.

Vital
Images also expects that a number of other advantages of 3D medical imaging
products will support growth in the 3D medical imaging industry:


  Diagnoses based on 2D images, or slices,
  require the clinician to assemble a 3D view mentally to understand the true
  anatomy and pathology.  Given the
  industry pressure on cost-effective outcomes, 3D imaging is a valuable tool
  for accelerating diagnoses, potentially eliminating unnecessary tests and
  treatment, optimizing the use of minimally invasive surgery and therapies,
  and gaining additional insight needed for clinical decisions.
  Spatial relationships are of paramount
  importance in surgery, and 3D views displaying anatomy and pathology can greatly
  aid in surgical planning.  3D medical
  imaging has the potential to promote improved surgical outcomes by giving
  surgeons a better road map from which to plan their operative procedures.  Interactive navigation of volume data from
  scanners may also have the capability to spare patients from invasive
  procedures like endoscopy or conventional angiography.
  Recent technology improvements in CT and MR
  scanners enable them to generate an increasing number of slices per exam,
  resulting in over 1000 images, which is more than 5 times as many images as
  the same study less than five years ago. 
  This makes the viewing of printed images on x-ray film, rather than in
  a medical imaging system, logistically impractical and expensive.
  Increased use of 3D medical imaging
  technology has the potential to enhance radiologists ability to communicate
  their findings to fellow clinicians, referring physicians and patients.  In addition, the integration of these
  clinical disciplines through electronic visualization, networking and the
  Internet has the potential to provide the opportunity for greater
  cross-discipline coordination due to increased speed, access to information
  and the resulting ability to perform consultative, interactive planning and
  examination on computer workstations.Markets

The
Company participates in the rapidly growing 3D medical imaging market.  The 3D medical imaging market also
interrelates with a number of other markets such as the diagnostic imaging
equipment market, the PACS market and the hospital and clinical information
systems markets.  3D medical imaging
software and systems have application and/or potential in diagnostic screening
and radiology, remote diagnosis and consultation (e.g., telemedicine), surgical
assessment, planning, navigation and follow-up, and radiation and chemotherapy
treatment planning and medical education. 
The customers for these applications include radiology, surgery and
oncology departments of hospitals and research centers, diagnostic imaging and
screening centers, outpatient surgery centers, clinics and physician groups.

The
Company believes that the worldwide market for 3D medical imaging systems is
largely unpenetrated and growing rapidly. 
Today, a small percentage of hospitals, clinics, and imaging centers
have purchased 3D medical imaging systems for use in diagnostic imaging.   Recent technological advances in both
computer hardware and software development have dramatically improved the
cost-to-performance ratio, bringing the prices for 3D medical imaging products
into the reach of most healthcare providers. 
In addition, increasing clinical awareness and improving utility of
applications, among other factors, are also driving demand for 3D medical
imaging products.  Based on an
increasing number of 3D procedures being performed as a result of growing use
of imaging technology, new 3D screening procedures, and broader acceptance of
3D applications, Vital Images estimates that the potential worldwide market for
3D medical imaging software and workstations will grow to more than $2 billion
within the next six years.

As
discussed above, the overall market for 3D medical imaging software and systems
is developing rapidly, as the related technology and products that define this
market are relatively new and undergoing rapid change.  Medical imaging software and system
solutions for diagnostic radiology have existed for the last several
years.  However, most have been
expensive, slow, difficult to use and of limited clinical application.  The use of medical imaging software and
systems to assist in surgical planning and navigation has only begun to emerge
in clinical practice in the last few years. 
While medical imaging software and systems have been used in these
applications and to support cancer treatment planning in the past, the Company
believes that perspective, three-dimensional volume rendering represents an
untapped resource to practitioners for diagnostic screening and radiology,
surgical planning and navigation and cancer treatment.

Strategy

The
Companys goal is to be a leading provider of 3D medical imaging software that
improves clinical outcomes and reduces costs. 
To achieve this goal, Vital Images intends to implement the following
key strategies:


  Develop and maintain leading-edge technology.The Company intends to continue its
  overall strategy of developing and marketing leading-edge medical 3D medical
  imaging software for a variety of medical applications.  As part of this strategy, the Company will
  continue to improve the speed and performance of its Vitrea 2 software.  In particular, the Company will be focused
  on developing additional protocols that enhance the ease-of-use of Vitrea 2,
  as well as increasing the number of platforms on which Vitrea 2 will operate.
  Further develop applications for the
  Companys 3D medical imaging technology.The Company intends to leverage its core
  competencies in volume rendering, computer graphics and clinical
  applications.  The Company plans to
  develop and offer a full range of 3D medical imaging software tools for
  radiological diagnosis, therapy planning and intra-operative
  visualization.  The Company believes
  that significant new opportunities exist for the application of its
  innovative technologies for the diagnosis and treatment of cardiovascular
  disease, cancer and orthopedics.
  Further penetrate the 3D medical imaging
  market.The Company intends to expand its sales and marketing staff and
  increase its marketing efforts in order to continue building momentum for the
  acceptance and purchase of Vitrea 2 and its other products.  A key challenge for the Company involves
  reaching and educating physicians and clinicians as to the benefits of the Vitrea 2
  software.  By convincing the ultimate
  users of the benefits of its system, the Company believes that it can
  successfully influence purchasing decisions for medical institutions
  purchasing or upgrading their imaging technology.  In addition, the Company will work to expand its appeal by
  implementing additional 2D capability as well as ensuring that its technology
  will easily integrate into hospital networks.
  Continue to seek collaborative partnerships
  with leading medical institutions.The Company has historically sought out
  and developed collaborative relationships with several prestigious medical
  institutions to develop and test the Companys visualization tools.  The Company will continue to pursue
  collaborations to focus on developing products that will improve clinical
  outcomes and reduce costs for the practices of medical imaging and surgery.
  Continue to seek collaborative partnerships
  with leading medical technology companies.In addition to collaborations with medical
  institutions, the Company intends to selectively pursue relationships with
  leading medical technology companies to expand the Companys clinical,
  distribution, financial and/or technical capability for its 3D medical
  imaging software products.  Examples
  of such relationships include the Companys marketing and distribution
  agreement with Toshiba America Medical Systems (TAMS) and its PACS
  relationship with A.L.I. Technologies, Inc. (ALI). See Business-Marketing
  and Distribution.Products and Product
Development

Vitrea.In December 1995, the Company assessed its
business strategy and determined that to optimize its dedicated participation
in the medical field, it needed to create a new product for direct clinical
application.  The objective for this new
product effort was to produce an easy-to-use, clinical software tool to allow
radiologists and other clinicians to use two- and three-dimensional
visualization in their routine clinical processes.  Unlike its VoxelView® software, the Company set out
to design this new software product for users with clinical knowledge, rather
than computer graphics expertise. 
Specifications for this new product, called Vitrea, were developed in
early 1996, with software development beginning in late spring of that
year.  The Company submitted 510(k)
documentation in September 1996 for Vitrea and was granted marketing clearance
by the U.S. Food and Drug Administration (the FDA) in November 1996 for use
as a clinical diagnostic and surgical planning device when used with CT and MR
medical imaging data.  Vitrea
was first released for sale to customers in October 1997.  In December 1999, the Company released Vitrea 2,
a Microsoft® Windows NT compatible version of its Vitrea software for 2D/3D
visualization and analysis of medical image data.  Vitrea 2 was Vital Images' first 3D-volume medical imaging
software product available for Windows NT and provides the speed and
ease-of-use the medical community demands for diagnosis and treatment planning
in a clinical environment.  In February
2001, the Company released Vitrea 2 Version 2.2, which included
significant enhancements for colon imaging and evaluation, as well as new
automated features for tumor volume measurement and 2D comparative review.



Vitrea 2capitalizes on the Companys experience
in 3D medical imaging and provides clinicians with an easy-to-use tool for
radiological diagnosis and therapy planning. 
It represents the Companys most important step to date as a provider of
a range of clinical tools for broad distribution to the 3D medical imaging
market.  Vitrea 2s primary features
are its high-speed rendering capability and the ability to provide two- and
three-dimensional viewing for routine diagnosis and therapy planning, without
requiring the user to be trained in computer graphics techniques.  The Company believes that both of these features,
speed and ease-of-use, now make it possible to use three-dimensional medical
imaging in daily clinical routines.  A Vitrea 2
user, following a built-in clinical workflow, can view the image data in two or
three dimensions using visualization settings based on specific clinical
applications stored within the system as dedicated visualization
protocols.  The user may then
interactively navigate around, or fly through, the image to view clinically
relevant anatomies and pathologies.  Vitrea 2software
also allows the user to capture views by taking snapshots, which can be
integrated into customized reports for electronic transmission and archiving
through a DICOM network or sent to another location via the Internet.

Vitrea 2software
conforms to the latest medical imaging and computer industry standards, such as
OpenGL
computer graphics application programming interface (API) and DICOM.

The
Company offers Vitrea 2 primarily as an integrated software and hardware
system, consisting of Vitrea 2software installed on a personal
computer (PC).  Pursuant to purchasing
arrangements between the Company and computer resellers, the Company purchases
personal computers at a nominal discount, installs its Vitrea 2software, and
markets the package as an integrated 3D medical imaging solution, thereby
implementing the Companys strategy to develop, market, sell and support an
integrated 3D medical imaging workstation. 
Currently Vitrea 2 operates on PC workstations from Omni Tech, Inc.,
Hewlett-Packard Company and Dell Computer Corporation, and UNIX workstations
from Silicon Graphics, Inc.  The Company
also sells a limited number of software licenses without the related
workstation hardware.  The list price
for a base model integrated workstation and software package is approximately
$93,000, and the list price for the Vitrea 2 software without a workstation is
approximately $81,000.

In
addition to its immediate clinical applications, Vitrea 2software also
incorporates a number of additional technological advances, thereby making it
adaptable to routine clinical use in surgical navigation and cancer treatment
planning and for integration into diagnostic imaging equipment manufactured by
other companies.  In particular, Vitrea 2
software was written using advanced programming techniques, a modular, object-oriented
design, C++ programming language, and a shared messaging structure.  The Company believes these characteristics
make it practical to modify Vitrea 2 software to suit the clinical
needs of surgical navigation and oncology, as well as allowing diagnostic
equipment manufacturers to integrate Vitrea 2software or its components into
imaging system consoles and off-line review stations, thereby providing the
Company with the opportunity to leverage the Vitrea 2 software
development investment into new commercial areas.

VScore.In August 1999, the Company introduced its VScoresoftware
for coronary artery calcium scoring. 
The VScore
software product was the Companys first add-on option to the Companys Vitrea 2
3D medical imaging software product. 
The VScore
option adds the functionality to non-invasively quantify calcium in the four
major coronary arteries using CT image data. 
The list price of the VScore software option is $14,000.  In August 2000, the Company introduced VScore with
EKG GateÔ, which allows physicians and
technologists to select the images with the least amount of motion by matching
the EKG signal with the images.  The
list price of the VScore with EKG Gatesoftware option is $25,000.  The Company intends to continue developing
similar add-on products for a variety of other medical applications.



Advanced 3DI.In August 1996, the Company entered into a product development agreement
with ATL Ultrasound, Inc., one of the leading ultrasound system vendors.  Pursuant to this agreement, each party
agreed to collaborate exclusively with the other for a period of five years in
connection with the development of three-dimensional visualization products for
medical diagnostic ultrasound imaging applications, provided that the Company
may collaborate with other parties in connection with products to be used in
multi-modality environments (i.e., environments that offer multiple imaging
technologies and not just ultrasound imaging). 
ATL reimburses the Company for certain product development costs and has
responsibility for obtaining regulatory approvals.  Intellectual property developed jointly by the parties pursuant
to this agreement is jointly owned by the parties, each with the right to use
or license such intellectual property. 
The Company typically receives $5,000 to $10,000 for each Advanced 3DI
sale by ATL.  In September 1998, ATL was
acquired by Royal Phillips Electronics, a competitor of the Companys in the 3D
medical imaging market.  During both
2000 and 1999, the Company experienced a trend of steadily declining revenue
from sales of Advanced 3DI. 
Accordingly, the Company is not anticipating significant revenue in the
foreseeable future from ATL for sales of Advanced 3DI.

VoxelView.The Companys VoxelView software received
marketing clearance from the FDA in November 1995 for use as a clinical
diagnostic and surgical planning device when used with CT and MR medical
imaging data.  VoxelView software is sold
primarily to medical researchers, although radiologists and surgeons sometimes
use it as a clinical diagnostic and planning tool.  VoxelViewsoftwares primary capability is the ability to
provide volume rendered, three-dimensional views of human anatomy using
three-dimensional image data sets from imaging devices such as CT and MR
scanners.  VoxelView software is a
highly flexible tool, allowing the clinician or researcher to interactively
control many visualization parameters, including brightness, contrast, color,
transparency, shading, lighting, texture, reflectivity and orientation.  However, the need to control these
visualization parameters limits the usefulness of VoxelView software in the
routine clinical setting, where an end user may be a skilled medical technician
lacking expertise in computer graphics techniques.  VoxelView is sold only as a software package without
computer hardware, and the Company does not actively market this product.  The list price for a VoxelView software license
is $20,000.

Maintenance and Support.In addition to its system and software
products, the Company also offers maintenance and support services to its
customers, as well as certain other services such as installation and
training.  In connection with the
licensing of Vitrea 2software, the Company markets annual maintenance
services for both Vitrea 2 software and the integrated Vitrea 2 system, pursuant to
which the Company provides software updates, minor feature enhancements, error
correction, telephone support and general maintenance services for an annual
fee of approximately $7,000.  Outside of
these maintenance services, the Company is required by FDA regulations to
provide certain levels of support to end users as a result of the use of its
products as medical devices. 
Maintenance services currently marketed by the Company do not include
installation, training and other services, whether on- or off-site, as such
services are charged separately by the Company.

License
fees accounted for 66%, 63% and 61% of total revenue in each of the fiscal
years ended December 31, 2000, 1999 and 1998, respectively.  Maintenance and services comprised 13%, 13%
and 11% of total revenue for the years ended December 31, 2000, 1999 and 1998,
respectively, while hardware accounted for 21%, 24% and 28% of total revenue
for the years ended December 31, 2000, 1999 and 1998, respectively.

The
Company expensed $3,036,000, $2,525,000 and $1,815,000 incurred in its research
and development efforts in each of the fiscal years ended December 31, 2000,
1999 and 1998, respectively.



Collaborative
Relationships

Vital
Images has formed collaboration relationships with some of the leading
universities and physicians in medicine and medical imaging to develop what it
believes to be the most innovative and clinically relevant medical imaging
solutions.  Vital Images has entered
into clinical collaboration agreements with universities and physicians to:


  Identify new clinical applications where 3D
  medical imaging can improve clinical outcomes and reduce costs;
  Develop clinical routines that incorporate
  Vital Images 3D medical imaging software in normal diagnostic and therapy
  planning practices;
  Develop new features that facilitate and
  improve diagnosis and therapy planning for Vital Images future products;
  Assess the clinical value of Vital Images
  3D medical imaging software for given applications; and
  Develop automated rendering protocols for
  3D CT or MR data.The
following universities and physicians have entered into agreements with Vital
Images for the purpose of forming collaborative relationships:


  UCLA Medical Center
  Duke University Medical Center
  University of Iowa Hospital and Clinics
  Mallinckrodt Institute of Radiology at the
  Washington University School of Medicine
  University of Minnesota-Fairview University
  Medical Center
  University of North Carolina at Chapel Hill
  Northwestern University Medical Center
  Hospital of the University of Pennsylvania
  Stanford University Medical Center
  Yale University School of MedicineIn
general, the Companys agreements with its collaborative partners do not
provide such collaborators with any ownership of technology developed by the
Company in connection with the collaboration and do not provide for the payment
of any fees or royalties to such collaborators.  However, the Company was obligated to pay a royalty to the
Stanford University Medical Center equal to one-half of one percent of the
Companys software license revenue from the sale of Vitrea and Vitrea 2through
September 2000.

Competition

The
3D medical imaging market is developing and growing rapidly.  It is intensely competitive, subject to
rapid change and significantly affected by new product introductions and other
market activities of industry participants. 
The Companys primary competitors are the various diagnostic imaging
system suppliers, which are typically large, multinational companies, having
far greater financial and technical resources than the Company, and which also
have well-established sales and distribution networks for their products. These
companies, including GE Medical Systems, Siemens Medical Systems, Inc., Marconi
Medical Systems and Philips Medical Systems, are engaged in the business of
developing and marketing medical imaging systems, such as CT and MR
equipment.  These competitors offer 3D
medical imaging capabilities integrated into their products in addition to the
2D medical imaging capabilities typically provided as a part of the operators
console on the imaging equipment itself. 
This medical imaging capability may be internally developed by these
companies, or may be licensed from independent vendors.  In order to compete effectively with these
companies, Vital Images must convince customers to separate their purchasing
decisions regarding the imaging equipment itself from the selection and
purchase of the 3D medical imaging workstations instead of purchasing an entire
integrated system manufactured by one entity. 
To a lesser extent, the Company also faces competition from other
medical imaging systems and software suppliers, PACS vendors, hospital, radiology
and clinical system suppliers, and internal development projects sponsored by
hospital radiology departments.

Other medical imaging systems and
software suppliers compete on the basis of volume rendering or other
visualization technologies, such as surface rendering.  PACS companies sometimes provide medical
imaging capability in addition to their image archiving and networking
products.  Vendors of hospital, clinical
and radiology information systems have also diversified into the PACS and
medical imaging product lines, either through internal development or business
development.  These companies, which may
be large or small, attempt to offer an integrated system covering a full range
of administrative, clinical and radiology information management capabilities
to healthcare providers.  Finally, some
research and university healthcare institutions may attempt to develop their
own 3D medical imaging systems.  These
institutions have in the past, and may in the future, attempt to secure FDA
clearance for such systems and to license such systems or technology for
general commercial sale.

The
Companys competitive strength is based on its ability to: (i) provide
differentiated 3D medical imaging products that operate in multi-vendor network
and image source environments; (ii) provide clinical quality, three-dimensional
images, volume rendered at high speed with interactive navigation on a
relatively low-cost standard computer; (iii) integrate clinical knowledge from
its collaborative clinical partners into its products; (iv) leverage its
visualization technology across multiple clinical disciplines, including
disease screening, clinical diagnosis and therapy planning; (v) offer a DICOM
client product which can operate on any DICOM network, independent of the
imaging system and network provider; and (vi) serve both original equipment
manufacturers (OEM) and end-user customers through the development of a
modular end-user product that can easily be segmented for OEM customers.

The
Company believes that product quality, performance, functionality and features,
quality of support and service, reputation and price are also important
competitive factors.  The Company
believes that customers will prefer Vitrea 2 because it is simple, fast and
affordable.  While price has been less
significant than other factors, increasing competition in the 3D medical
imaging market may result in price reductions and reduced gross margins.  In particular, should one or more of the
diagnostic imaging system suppliers choose to provide or distribute more
competitive medical imaging products than those offered by the Company, the
Companys business, financial condition and results of operations could be
materially adversely affected.

Marketing and Distribution

The
Company markets Vitrea 2 both as a software package and as part of an
integrated software and hardware system to radiologists, surgeons, primary care
physicians and medical researchers.  The
Company markets its products directly to end-user customers, such as hospitals
and clinics, as well as to select diagnostic imaging companies, digital imaging
equipment manufacturers and PACS companies for resale as a Vital Images
branded product.  In December 1999, the
Company established a strategic marketing alliance with ALI, a leader in the
management of clinical data.  Both Vital
Images and ALI can now offer an integrated solution to the data management
requirements of the new generation of CT and MR scanners.  In September 2000, the Company signed a
marketing and distribution agreement with TAMS, which named Vitrea 2
as TAMS exclusive 3D software for use with their CT scanners in the United
States.  The agreement runs through
March 31, 2002.  See Business 
Dependence on Major Customers.

In
addition, the Company markets its products directly to select OEMs on either a
standard basis or, in the case of Advanced 3DI, a customized basis.  In connection with its OEM opportunities,
the Company will either provide complete systems for resale by such OEMs or
will provide elements of its technology for incorporation into the products and
systems of such OEMs.

The
Company markets its products both domestically and internationally.  In the United States, the Company markets
its products through its direct sales force as well as through OEMs and
resellers.  Internationally, the Company
markets its products through OEMs and resellers.  See Note 9 to the Financial Statements - Major Customers and
Geographic Data for information regarding the Companys export sales.  As of December 31, 2000, the Company had
fourteen direct salespeople in the U.S., one international reseller
salesperson, one OEM customer and 13 international resellers.

Customers and Customer Support

Through
December 31, 2000, the Company has sold approximately 340 separate software
licenses for Vitreaand Vitrea 2 for use in approximately 270
different sites, including hospitals, clinics, imaging centers and other
sites.  The Companys customers include
Americas most renowned hospitals, including the following ten of the top fifteen
hospitals listed in U.S. News and World Reports honor roll of
top hospitals:




  Mayo Clinic
  
  Barnes-Jewish Hospital
  Massachusetts General Hospital
  
  Stanford University Hospital
  Cleveland Clinic
  
  Hospital of the University of Pennsylvania
  UCLA Medical Center
  
  UCSF Medical Center
  Duke University Medical Center
  
  University of Washington Medical CenterIn
addition, the advantages of Vitrea 2 software  simple, fast and
affordable  have also appealed to hospitals and clinics in smaller population
areas including:


  Allen Memorial Hospital–Waterloo,
  Iowa
  Campbell County Memorial HospitalGillette,
  Wyoming
  Diagnostic Radiology Associates of
  WisconsinRice Lake, Wisconsin
  Northeast Regional Medical
  CenterKirksville, Missouri
  Palmetto Baptist Medical CenterColumbia,
  South CarolinaThe
Company is committed to rapid response to customer service requests.  Customer support representatives are
available during the Companys business hours to answer questions about the
operation, maintenance and repair of the Companys products.

Intellectual Property

Although
the Company has filed patent applications with respect to certain aspects of
its technology, it generally does not rely on patent protection with respect to
its products and technologies.  Instead,
the Company relies primarily on a combination of trade secret and copyright
law, employee and third-party nondisclosure agreements and other protective
measures to protect intellectual property rights pertaining to its products and
technologies.  Because of the rapid pace
of technological change in the 3D medical imaging industry, the Company
believes that patent, trade secret and copyright protection are less
significant to its competitive position than factors such as the knowledge,
ability and experience of its personnel; new product developments and
enhancements; and ongoing, reliable product maintenance and support.

The
Company has been issued Patent No. 5,986,662 from the U.S. Patent and Trademark
Office for its mechanism for automated protocol selection and Patent No. 6,130,
671 for the mechanism to calculate simulated lighting in 3D images, both of
which are utilized in the Vitrea 2 software.  The use of automated protocol selection
within Vitrea
2 allows the user to view image data in two or three dimensions
using visualization settings based on specific clinical applications stored
within the software.  This unique
technology adds significantly to the simplicity of use of the software  a key
advantage over competing technologies. 
The mechanism for calculating simulated lighting in 3D images permits
two-sided lighting in volume-rendered images, which is crucial for viewing
image data that represents edges of bright as well as dark regions.  These include producing simulated endoscopic
images of contrast-filled blood vessels, the gastrointestinal tract and the
urinary system.

The
Company does not own all of the software and other technologies used in its
products, but it has the licenses from third parties that the Company believes
are necessary for using that technology in its current products. It may be
necessary to renegotiate with such third parties for inclusion in any new
versions of the Companys current products or any new products. Such third
party licenses may not be available on reasonable terms, or at all.

Manufacturing and Service

The
Companys manufacturing efforts are limited to the production, quality
assurance and distribution of its software, which is distributed on
CD-ROM.  The software is sent to the customer
site and loaded into a personal computer. 
The software for Vitrea 2 is loaded into the computer by
Company personnel, as part of the Companys installation services, which are
priced and billed incrementally to the software license billing.  In addition to the loading of software into
the computer, the Companys installation services also include integrating Vitrea 2
workstations into customers computer networks, configuring the network
requirements and validating software operability on site.  VoxelView software is typically sold alone
and loaded into the computer equipment with telephone assistance from the
Company, as needed.

The
Company relies primarily on its own software development as its core
competence.  The Company sources certain
utility software from third parties, see Intellectual Property above, and the
operating system for integrated computer workstations from other parties.  In addition, the Company sources systems
components, computers and computer peripherals from third party suppliers.

Governmental Regulation

As
medical devices, the Companys 3D medical imaging software products are subject
to extensive and rigorous regulation by numerous governmental authorities,
principally the FDA and corresponding foreign agencies.  In the United States, the FDA administers
the Federal Food, Drug and Cosmetic Act and its amendments.  These regulations classify medical devices
as either Class I, II or III devices, which are subject to general controls, special
controls or pre-market approval requirements, respectively.  Most Class I and II devices, as well as some
Class III devices, can be cleared for marketing pursuant to a 510(k) pre-market
notification. The process of obtaining a 510(k) clearance typically can take
several months to a year or longer.

Class
III devices generally require more stringent clinical investigation and
pre-market clearance requirements.  In
such cases, the FDA will require that the manufacturer submit a pre-market
approval (PMA) application that must be reviewed and approved by the FDA
prior to the sale and marketing of the device in the United States.  The process of obtaining a PMA can be
expensive, uncertain and lengthy, frequently requiring anywhere from one to
several years from the date of FDA submission, if approval is obtained at
all.  Moreover, a PMA, if granted, may
include significant limitations on the indicated uses for which a product may
be marketed.

Vitrea 2and VoxelView
are classified as Class II medical devices and have received marketing
clearance from the FDA as the result of 510(k) submissions.  Specifically, Vitrea 2 has been cleared to
be marketed for use with CT and MR scanners, and the Companys VScore
software options have been cleared for use in coronary artery calcium
scoring.  ATL is responsible for
obtaining any FDA approval necessary for the marketing and sale of Advanced
3DI.  Future products, add-on options to
existing software, and expanded claims of efficacy will likely require
additional 510(k) applications.

In
the early 1990s, the review time by the FDA to clear medical devices for
commercial release lengthened and the number of clearances, both of 510(k)
submissions and PMAs, decreased.  In
response to public and congressional concern, the FDA Modernization Act of 1997
was adopted with the intent of bringing better definition to the clearance
process.  Although this Act has resulted
in improved cycle times for product clearance, there can be no assurance that
the FDA review process will not involve delays or that certain clearances will
be granted on a timely basis.

The Company is also increasingly becoming
subject to regulation in those foreign countries in which it sells its
products.  Many of the regulations
applicable to the Companys products in such countries are similar to those of the
FDA.  The Companys ability to
successfully market and sell its products internationally depends in large part
on its ability to comply with such foreign regulatory requirements. Vitrea 2
software has been Conformitee Europeene (CE) marked, indicating conformance
with applicable sections of the Medical Device Directive 93/42/EEC, which
allows the product to be marketed in the member countries of the European
Communities.

The
Company is also subject to periodic inspections by the FDA, whose primary
purpose is to audit the Companys compliance with quality system regulations
established by the FDA and other applicable government standards.  Regulatory action may be initiated in
response to audit deficiencies or to product performance problems.  The Company believes that its manufacturing
and quality control procedures are in essential compliance with the
requirements of the FDA regulations.

In
January 2001, the Company announced that it had received ISO 9001 Certification
and an upgraded Class I Measurement CE Mark for its medical imaging software
products.

The
financial arrangements through which the Company markets, sells and distributes
its products may be subject to certain federal and state laws and regulations
in the United States with respect to the provision of services or products to
patients who are Medicare or Medicaid beneficiaries.  Violations of these laws and regulations may result in civil and
criminal penalties, including substantial fines and imprisonment.  In a number of states, the scope of these
laws and regulations have been extended to include the provision of services or
products to all patients, regardless of the source of payment, although there
is variation from state to state as to the exact provisions of such laws or
regulations.  In other states, and, on a
national level, several health care reform initiatives have been proposed which
would have a similar impact.  The
Company believes that its operations and its marketing, sales and distribution
practices currently comply with all current fraud and abuse and physician
anti-referral laws and regulations, to the extent they are applicable.

Third Party Reimbursement and Cost Containment

The
Companys products are purchased primarily by hospitals, clinics, imaging
centers and other users that bill various third party payers for the services
provided to the patients.  These payers,
which include Medicare, Medicaid, private insurance companies and managed care
organizations, reimburse part or all of the costs and fees associated with the
procedures utilizing the Companys products. 
The medical imaging services performed using the Companys software are
covered by current CPT codes (Current Procedural Terminology, as defined by the
Healthcare Financing Administration). 
As such, hospitals providing services on the Companys 3D medical
imaging workstations can seek reimbursement by using existing, approved CPT
codes.  Medicare and Medicaid
reimbursement for hospitals is based on a fixed amount for admitting a patient
with a specific diagnosis.  Because of
this fixed reimbursement method, hospitals have incentives to use less costly
methods in treating Medicare and Medicaid patients, and will frequently make
capital expenditures to take advantage of less costly treatment
technologies.  Frequently, reimbursement
is reduced to reflect the availability of a new procedure or technique and, as
a result, hospitals are generally willing to implement new cost-saving
technologies before these downward adjustments take effect.  Likewise, because the rate of reimbursement
for certain physicians who perform certain procedures has been, and may in the
future, be reduced in the event of changes in the resource-based relative value
scale method of payment calculation, physicians may seek greater cost efficiency
in treatment to minimize any negative impact of reduced reimbursement.  Any amendments to existing reimbursement
rules and regulations which restrict or terminate the reimbursement eligibility
(or the extent or amount of coverage) of medical procedures using the Companys
products or the eligibility (or the extent or amount of coverage) of the
Companys products could have a material adverse impact on business.

In response to the focus of national
attention on rising health care costs, a number ofchanges to
reduce costs have been proposed or have begun to emerge.  There have been, and may continue to be,
proposals by legislators and regulators and third party payers to reduce these
costs.  There has also been a
significant increase in the number of Americans enrolling in some form of
managed care plan and, in addition, many hospitals participate in or have
agreements with HMOs.  It has become a
typical practice for hospitals to affiliate themselves with as many managed
care plans as possible.  Higher managed
care penetration typically drives down the prices of healthcare procedures,
which in turn places pressure on medical supply prices.  This causes hospitals to implement tighter
vendor selection and certification processes by reducing the number of vendors
used, purchasing more products from fewer vendors and trading discounts on
price for guaranteed higher volumes to vendors.  Hospitals have also sought to control and reduce costs over the
last decade by joining group purchasing organizations or purchasing
alliances.  The Company cannot predict
what continuing or future impact these practices, the existing or proposed
legislation, or such third party payer measures may have on its future
business.

Employees

As of February 28, 2001, the Company had 73
full-time employees, with 23 involved in research and development, 26 in sales
and marketing, 10 in technical support functions and 14 in administrative
functions.  The Company is not a party
to any collective bargaining agreement involving its employees and believes its
relationship with its employees is good.

EXECUTIVE
OFFICERS OF THE REGISTRANT

Set forth below are the names of the
executive officers of the Company as of February 28, 2001, their ages, the year
first elected as an executive officer of the Company and employment for the
past five years.


NAME
  AGE
  TITLEAlbert Emola
  50
  President, Chief Executive Officerand DirectorVincent J. Argiro, Ph.D.
  45
  Chief Technology Officer, Founderand DirectorSteven P. Canakes
  45
  Vice President - SalesDavid M. Frazee
  40
  Vice President - EngineeringGregory S. Furness
  46
  Vice President - Finance, ChiefFinancial Officer, Treasurerand SecretaryJay D. Miller
  41
  General Manager andVice President  Business DevelopmentRobert C. Samec
  48
  Vice President - Regulatory Affairs,Quality Assurance and OperationsAlbert Emola.Mr. Emola
was appointed President and Chief Executive Officer of Vital Images in December
1999.  From January 1999 until December
1999, Mr. Emola served as an independent management consultant to start-up
medical device companies.  From August
1994 to January 1999, he served as President and Chief Executive Officer of
Flexmedics Corporation, a designer and manufacturer of nitinol-based medical
products.  From May 1991 until August
1994, Mr. Emola served as a consultant to other start-up medical companies
requiring broad-based strategic direction and implementation.  Mr. Emola also served at St. Jude Medical,
Inc. from November 1985 to May 1991, most recently as Vice President of
Corporate Development.

Vincent J. Argiro,
Ph.D.Dr. Argiro, the Founder of the Company, was named Chief Technology
Officer of Vital Images in October 1995. 
From May 1994 until May 1997, Dr. Argiro also served as a Vice President
of Bio-Vascular, the former parent company of Vital Images.  Dr. Argiro served as a director of
Bio-Vascular from May 1994 until March 1996. 
Following the acquisition of the Company by Bio-Vascular in May 1994,
Dr. Argiro served as President of the Company until October 1995.  Dr. Argiro served as Chairman of the Board
of the Company from 1988 until May 1994. 
From 1988 to 1990 and from September 1991 to June 1992, Dr. Argiro also
served as President of the Company.

Steven P. Canakes.Mr. Canakes was named Vice President  Sales in March 2000.  Prior to that he was the Companys Vice
President  U.S. Sales from August 1998 to March 2000 and its Director of U.S.
Sales from March 1998 to August 1998. 
From July 1996 to March 1998, Mr. Canakes was Vice President of Business
Development for MedManagement, LLC in Plymouth, Minnesota.  From February 1994 to July 1996, Mr. Canakes
served as Vice President of Sales for Medintell Systems and Value Health
Corporation, a Medintell Systems Division. 
Prior to February 1994, Mr. Canakes was a CT Product Sales Manager for
Picker International, Inc.

David M. Frazee.Mr. Frazee was
named Vice President  Engineering in March 1999.  From July 1998 to March 1999, Mr. Frazee served as a Manager in
the Solution Strategies Practice of Whittman-Hart, Inc.  From April 1997 to July 1998, Mr. Frazee was
Director of Program Management and Internet Products at LodgeNet Entertainment,
Inc.  Prior to April 1997, Mr. Frazee
held several systems and software development and management positions at GE
Medical Systems, Inc., most recently as Manager of the Global Software
Applications Operation.

Gregory S. Furness.  Mr. Furness was named Vice President 
Finance, Chief Financial Officer, Treasurer and Secretary of Vital Images in
February 1997.  From December 1987 to
December 1996, Mr. Furness served as Executive Vice President and Chief
Financial Officer of CAMAX Manufacturing Technologies, Inc., a computer-aided
manufacturing software developer, which was acquired by Structural Dynamics
Research Corporation in June 1996. 
Prior to December 1987, Mr. Furness was employed as Vice President,
Finance and Chief Financial Officer of Mizar, Inc., and as an audit manager at
Deloitte and Touche LLP.  Mr. Furness is
a Certified Public Accountant.

Jay D. Miller.Mr. Miller was named General Manager and Vice President  Business
Development in August 1998 and served as the Companys Vice President -
Marketing and Business Development from February 1997 to August 1998.  From 1989 until his employment by the Company,
Mr. Miller was employed by GE Medical Systems, Inc. in positions of increasing
responsibility in the marketing area, including serving as product manager and
global product line strategy for MR imaging products and marketing manager for
the cardiology market segment.  Prior to
1989, Mr. Miller was employed by Siemens Medical Systems in technical
marketing.

Robert C. Samec.Mr. Samec was named Vice President  Regulatory Affairs and Quality
Assurance in October 1998 and assumed responsibilities for Operations in
September 2000.  Mr. Samec served as
Vice President, Regulatory/Quality of ContiMed, Inc., a urologic device
developer from October 1997 to October 1998. 
Prior to October 1997, Mr. Samec spent 15 years with Aequitron Medical,
Inc., a developer of portable respiratory devices, where he was Vice President,
Regulatory Affairs/Quality Assurance.

ITEM 1A - IMPORTANT FACTORS

The following factors are important and
should be considered carefully in connection with any evaluation of the
Company's business, financial condition, results of operations and
prospects.  Additionally, the following
factors could cause the Company's actual results to materially differ from
those reflected in any forward-looking statements of the Company.

Historical Operating Losses

The Company had operating losses of
$2,787,000, $3,303,000 and $3,467,000 for the years ended December 31, 2000,
1999 and 1998, respectively, and, with the exception of the fiscal year ended
October 31, 1995, has incurred operating losses each year since 1990.  As of December 31, 2000, the Companys
accumulated deficit was $19,866,000. 
The Companys ability to attain and maintain profitability will depend
on, among other things, its ability to successfully market its products, make
new product offerings, respond to competitive developments and attract and
retain qualified sales, technical and management employees.  There can be no assurance that the Company
will achieve profitable operations.  See
Managements Discussion and Analysis of Financial Condition and Results of
Operations.

New Product Acceptance

The Companys success depends on its
ability to successfully market itsVitrea 2software for clinical use, and the
ability and willingness of physicians to use two- and three-dimensional medical
imaging software in disease screening, clinical diagnosis and therapy planning
and other diagnosis, surgical, and treatment protocols.  The three–dimensional medical imaging
software offered by Vitrea 2 represents a new alternative to
the conventional methods traditionally used for viewing medical images in the
clinical setting.  The acceptance of Vitrea 2
by physicians and other clinicians will depend on the Companys ability to
educate those users as to the speed, ease-of-use and benefits offered by the Vitrea 2
system, as well as the timely introduction of new features and functions by the
Company.  There can be no assurance that
users will prefer three-dimensional medical imaging software over less
expensive two-dimensional medical imaging software, or that the Company will
succeed in its efforts to further develop, commercialize, and achieve market
acceptance for its Vitrea 2 product, or for any other product
in the clinical setting.  See
BusinessTechnology, Industry Background, Markets and Competition.

Substantial Reliance on a Single Product

Revenue
from software and hardware sales of the Vitrea 2 system constituted 84% of the
Companys total revenue for the year ended December 31, 2000 and 78% of the
Companys total revenue for the year ended December 31, 1999.  Further, the Company anticipates that
revenue from the sale of Vitrea 2 will continue to account for a
substantial portion of the Companys revenue for the foreseeable future.  As such, the failure of physicians to accept
Vitrea 2
would have a material adverse impact on the Companys results of operations and
financial condition.  The Company no
longer markets, but has occasional sales of, its VoxelView software product,
which is used primarily by medical researchers.

Dependence on Market Growth

The
3D medical imaging industry in which the Company markets its products is still
developing due to the fairly recent availability of high performance computers
at reduced prices, the recent adoption of industry standards for the
generation, transmission and storage of medical imaging data, and changing
medical practices. Historically, there has been a perception that
three-dimensional imaging was too slow or difficult for clinical use.  This perception was due largely to the
relatively slower processing speed of workstations available in the past.  Although the Company believes that the
recent advances in the affordability of high performance computers and in the
development of industry standards for the generation, transmission, and storage
of imaging data will provide opportunities for growth in the 3D medical imaging
industry, given the uncertainties associated with the developing stage of this
industry, there can be no assurance that it will continue to develop in the
manner anticipated by the Company. 
Accordingly, there can be no assurance that the 3D medical imaging
industry will provide growth opportunities for the Company and its software
products or that the Companys business strategies will be successful as the 3D
medical imaging industry continues to evolve. 
Ultimately, if the 3D medical imaging industry fails to develop as the
Company expects, the Companys business, results of operations and financial
condition will be materially and adversely affected.

Need for Additional Capital

If
the Companys operations progress as anticipated, of which there can be no
assurance, the Company believes that its existing cash balances, together with
cash flows from operations and borrowings available under its credit facility,
should be sufficient to satisfy its cash requirements for at least the next 12
months.

The
timing of the Companys future capital requirements will depend on a number of
factors, including, but not limited to, the ability of Vital Images to
successfully market its products; the ability and willingness of physicians to
use two- and three-dimensional medical imaging software in disease screening,
clinical diagnosis and therapy planning and other diagnosis, surgical, and
treatment protocols; the impact of competition in the 3D medical imaging
business; the ability of the Company to differentiate its products from
competing products; the capital equipment budget constraints of some potential
purchasers; the ability of the Company to build an effective sales and
distribution force; and the ability to enhance existing products and develop
new products on a timely basis.  To the
extent that the Companys operations do not progress as anticipated, additional
capital may be required sooner.  There
can be no assurance that any required additional capital will be available on
acceptable terms, or at all, and the failure to obtain any such required
capital would have a material adverse effect on Vital Images business.  The issuance of additional equity securities
may result in dilution of current shareholder voting and ownership
interests.  See Managements Discussion
and Analysis of Financial Condition and Results of Operations.



Highly Competitive
Industry

The
Company faces intense competition in the 3D medical imaging industry.  The Company expects technology to continue
to develop rapidly, and the Companys success will depend to a large extent on
its ability to maintain a competitive position with its products.  Companies competing with the Company in the
3D medical imaging industry include large, established manufacturers of CT and
MR imaging equipment.  Companies such as
GE Medical Systems, Siemens Medical Systems, Inc., Marconi Medical Systems and
Philips Medical Systems typically offer their own medical imaging software and
workstations as part of their integrated imaging and scanner systems.  The Companys ability to successfully market
and sell its current 3D medical imaging products to prospective customers
depends, in part, on its ability to persuade such customers to separate the purchase
of CT or MR equipment from the selection and purchase of 3D medical imaging
workstations.  In addition to having
significantly greater capital and staffing resources for research and
development that are critical to success in the rapidly changing 3D medical
imaging industry, such companies also have well-established marketing and
distribution networks and have a competitive advantage in marketing 3D medical
imaging tools as an integrated part of their imaging products.  While price has been less significant than
other factors, increasing competition may result in price reductions and
reduced gross margins.  Additionally,
the Company faces competition from other entities, such as other information
storage and retrieval vendors, hospital, radiology and clinical systems
suppliers and internal development projects sponsored by hospital radiology
departments.  There can be no assurance
that the Company will be able to compete effectively with such manufacturers or
competing entities.  See BusinessTechnology,
Industry Background and Competition.

Risk of Technological Obsolescence

The
3D medical imaging market is characterized by rapid innovation and
technological change.  There can be no
assurance that the Company will be able to compete effectively in the
marketplace or that products developed by its competitors will not render its
products obsolete or non-competitive. 
Similarly, there can be no assurance that the Companys competitors will
not succeed in developing or marketing products that are viewed as providing
superior clinical performance or are less expensive than the Companys products
currently marketed or to be developed.

Dependence on Major Customers

One
of the Companys principal distribution channels is to sell its Vitrea 2
medical imaging workstations for inclusion with the delivery of medical imaging
equipment being sold by TAMS.  Sales by
the Company to TAMS accounted for approximately 27%, 21% and 23% of the
Companys total revenue for the years ended December 31, 2000, 1999 and 1998,
respectively. Management believes a limited number of large customers may
continue to account for a significant portion of the Companys revenue during
any given period for the foreseeable future. 
Except for its marketing and distribution agreement with TAMS, the
Company currently has no long-term purchase or other agreements with any of its
customers and sales are generally made pursuant to purchase orders.  A reduction, delay, or cancellation of
orders from one or more of its significant customers likely would have a
material adverse effect on the Companys operating results.  See Business-Marketing and Distribution.

Fluctuations in Operating Results

The
Company may experience significant fluctuations in future annual and quarterly
operating results.  If these
fluctuations occur, they may result in volatility in the price of the Companys
common stock.  Quarterly revenue and
operating results may fluctuate as a result of a variety of factors including,
but not limited to, the timing of significant orders, the timing of product
enhancements and new product introductions by the Company, its competitors and
its customers, the pricing of the Companys products, changes in customers
budgets, and competitive conditions, many of which are beyond the control of
the Company.

Government Regulation

The
Companys products are subject to regulation by the FDA and by comparable
agencies in foreign countries.  In the
United States, the FDA regulates the development, introduction, manufacturing,
labeling and record keeping procedures for medical devices, including 3D
medical imaging software and systems. 
The process of obtaining marketing clearance from the FDA for new
products and new applications for existing products can be time-consuming and
expensive.  All of the current products
actively marketed by the Company have received marketing clearance from the FDA
pursuant to 510(k) pre-market notifications. 
Vitrea
2 has been approved to be marketed for use with CT and MR scanners,
and the Companys VScoreoptions have been approved for use in coronary artery
calcium scoring.  ATL Ultrasound, Inc.
(ATL) is responsible for obtaining any FDA approval necessary for the
marketing and sale of Advanced 3DI. 
There can be no assurance, however, that clearance will be granted with
respect to future products or enhancements, or that FDA review will not involve
delays that would adversely affect the Companys ability to market such future
products or enhancements.  In addition,
there can be no assurance that future products or enhancements will not be
subject to the more lengthy and expensive pre-market approval process with the
FDA.

Even
if regulatory approvals to market a product are obtained from the FDA, these
approvals may entail limitations on the indicated uses of the product.  Product approvals by the FDA can also be
withdrawn due to failure to comply with regulatory standards or the occurrence
of unforeseen problems following initial approval.  The FDA could also limit or prevent the distribution of the
Companys products and has the power to require the recall of such
products.  FDA regulations depend
heavily on administrative interpretation, and there can be no assurance that
future interpretations made by the FDA or other regulatory bodies will not
adversely affect the Company.  The FDA
may inspect the Company and its facilities from time to time to determine
whether the Company is in compliance with various regulations relating to
specification, development, documentation, validation, testing, quality control
and product labeling.  A determination
that the Company is in violation of such regulations could lead to imposition
of civil penalties, including fines, product recalls or product seizures and,
in extreme cases, criminal sanctions.

The
Company markets its products both domestically and internationally.  International regulatory bodies have
established varying regulations governing product standards, packaging
requirements, labeling requirements, import restrictions, tariff regulations,
duties and tax requirements.  The
inability or failure of the Company to comply with the varying regulations or
the imposition of new regulations could restrict its ability to sell its
products internationally and could thereby adversely affect the Companys
business.  See BusinessGovernmental
Regulation.

Uncertain Protection for Intellectual Property; Possible Claims of
Others

Although the Company has filed patent
applications with respect to certain aspects of its technology, it generally
does not rely on patent protection withrespect to
its products and technologies.  Instead,
the Company relies primarily on a combination of trade secret and copyright
law, employee and third-party nondisclosure agreements and other protective
measures to protect intellectual property rights pertaining to its products and
technologies.  There can be no assurance
that these measures will provide meaningful protection of the Companys trade
secrets, know-how or other intellectual property in the event of any
unauthorized use, misappropriation or disclosure or that others will not
independently develop similar technologies or duplicate any technology
developed by the Company.  In addition,
to the extent that any patents are applied for, there can be no assurance that
such applications will result in issued patents or, if issued, that such
patents will be held to be valid or will otherwise be of value.  While the Company does not believe that its
products and technologies infringe any existing patents or intellectual
property rights of third parties, there can be no assurance that such
infringement does not exist.  The costs
of defending an intellectual property claim could be substantial and could
adversely affect the Company, even if it was ultimately successful in defending
any such claims.  If the Companys
products or technologies were found to infringe the rights of a third party,
the Company could be required to pay significant damages or license fees or
cease production, any of which could have a material adverse effect on the
Companys business.  See
BusinessIntellectual Property.

Product Liability Risk; Limited Insurance Coverage

The
manufacture and sale of products used in the practice of medicine entail
significant risk of product liability claims. 
While the Company currently maintains product liability insurance in the
amount of $6,000,000 per occurrence and $7,000,000 in total and also maintains
errors and omissions coverage in the amount of $6,000,000 per occurrence and in
total, there can be no assurance that its coverage limits will be adequate to
protect the Company from any liabilities it might incur in connection with the
sale of its products, or that the Company will be able to maintain this level
of coverage in the future.  The Company
also may require increased product liability coverage as additional products
and updates are released.  Such
insurance is expensive and in the future may not be available on acceptable
terms, if at all.  A successful product
liability claim or series of such claims against the Company in excess of the
Companys insurance coverage could have a material adverse effect on its
business.

Dependence on Key Employee; Need to Hire Additional Personnel

The
Company depends upon the continued active participation of Dr. Vincent J.
Argiro, its Chief Technology Officer and Founder.  Loss of the services of Dr. Argiro could have a material adverse
effect on the Companys future business. 
Dr. Argiro does not have an employment agreement with the Company, but
does have a confidentiality and non-competition agreement with the Company.The Company maintains key person
life insurance coverage on Dr. Argiros life in the amount of $500,000.

The
Companys ability to enhance and develop markets for its current products as
well as to introduce new products to the marketplace also depends on its
ability to attract and retain qualified scientific and management
personnel.  The Company competes for
such personnel with other companies, academic institutions, government entities
and organizations, many of which have substantially greater capital resources,
name recognition, and research and development capabilities than the
Company.  There can be no assurance that
the Company will be successful in recruiting or retaining such personnel.  The inability of the Company to recruit and
retain such personnel would have a material adverse effect on the Companys
business.

Management of Growth

The
execution of the Companys business plan will place increasing demands on the
Companys existing management and resources. 
There can be no assurance that the Company will be able to effectively
manage any expansion of its business, which could have a material adverse
effect on the Companys business, financial condition and results of
operations.

Dependence on Third-Party Reimbursement

The Companys
products are purchased by hospitals, clinics, imaging centers and other users,
which bill various third party payers, such as government health programs,
private health insurance plans, managed care organizations and other similar
programs, for the health care goods and services provided to their
patients.  There is currently a Current
Procedural Terminology (CPT) reimbursement code for procedures, which utilize
the Companys products.  However, the
amount of such reimbursement varies by location and is subject to change.  Payers may deny reimbursement if they
determine that a product used in a procedure was not used in accordance with
established payer protocol regarding cost-effective treatment methods or was used
for an unapproved indication.  Third party
payers are increasingly challenging the prices charged for medical services
and, in some instances, have put pressure on service providers to lower their
prices or reduce their services.  The
Company is unable to predict what changes will be made in the reimbursement
methods used by third party healthcare payers. 
There can be no assurance that procedures in which the Companys
products are used will be considered cost effective by third party payers, that
reimbursement for such procedures will be available or, if available, that
payers reimbursement levels will not adversely affect the Companys ability to
sell its products on a profitable basis. 
In addition, there have been and may continue to be proposals by
legislators, regulators and third party payers to curb further these costs in
the future.  Failure by hospitals and
other users of the Companys products to obtain reimbursement from third party
payers changes in third party payers policies toward reimbursement for
procedures using the Companys products or legislative action could have a
material adverse effect on the Companys business.  See BusinessThird Party Reimbursement and Cost Containment.

Uncertainty of Health Care Reform

The
levels of revenue and profitability of medical technology companies may be
affected by the efforts of government and third party payers to contain or
reduce the costs of health care through various means.  In the United States there have been, and
the Company expects that there will continue to be, a number of federal, state,
and private proposals to control health care costs.  These proposals may contain measures intended to control public
and private spending on health care as well as to provide universal public
access to the health care system.  If
enacted, these proposals may result in a substantial restructuring of the
health care delivery system. 
Significant changes in the nations health care system could have a
substantial impact on the manner in which the Company conducts its business and
could have a material adverse effect on the Companys business, financial
condition and results of operations.

Possible Issuances of Preferred Stock; Certain Anti-Takeover
Considerations

The
Companys Articles of Incorporation authorize the Companys Board of Directors,
without any action by its shareholders, to establish the rights and preferences
of up to 5,000,000 shares of currently undesignated preferred stock.  Such shares
of preferred stock could possess voting and conversion rights, which could
adversely affect the voting power of the holders of the common stock and may
have the effect of delaying, deferring or preventing a change in control of the
Company.  No shares of preferred
stock or other senior equity securities are currently designated and currently
there is no plan to designate or to issue any such securities. The Company is
also subject to certain anti-takeover provisions of the Minnesota Business
Corporation Act.  In addition, the
Company has adopted a Shareholder Rights Plan (the Rights Agreement) designed
to protect the Company and its shareholders from unsolicited attempts to
acquire the Company.  These measures
may, in certain circumstances, deter or discourage takeover attempts and other
changes in control of the Company not approved by its Board of Directors and
may have a depressive effect on any market for the Companys stock.  As a result, the Companys shareholders may
lose opportunities to dispose of their shares at the higher prices typically
available in takeover attempts or that may be available under a merger
proposal.  In addition, these measures
may have the effect of permitting the Companys current directors to retain
their positions and place them in a better position to resist changes that the
Companys shareholders may wish to make if they are dissatisfied with the
conduct of the Companys business.

No Dividends

The Company has not paid cash dividends on
its common stock in the past and does not intend to do so in the foreseeable
future.  See "Dividend
Policy."



Limitations on Director
Liability

As
permitted by Minnesota law, the Companys Articles of Incorporation provide
that a director of the Company shall not be personally liable to the Company or
its shareholders for monetary damages for breach of fiduciary duty as a
director, with certain exceptions. 
These provisions may discourage shareholders from bringing suit against
a director for breach of fiduciary duty and may reduce the likelihood of
derivative litigation brought by shareholders on behalf of the Company against
a director.  In addition, the Companys
Bylaws provide for mandatory indemnification of directors and officers to the
fullest extent permitted by Minnesota law.

Item 2.PROPERTIES

The Company's principal office is located in
Plymouth, Minnesota, where the Company currently occupies approximately 24,000
square feet under a lease that expires July 31, 2005. Under certain conditions
contained in the lease, the Company has the option to expand its facilities.

The Company considers its current facilities
adequate for its current needs and believes that suitable additional space will
be available as and if needed.

Item 3.LEGAL PROCEEDINGS

The Company is not engaged in any legal
proceedings at this time.

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

There was no matter submitted to the vote of
security holders during the fourth quarter of 2000.

PART II

Item 5.MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS

Effective
September 29, 2000 the Companys common stock began trading on the Nasdaq
SmallCap Market under the symbol VTAL. 
Prior to September 29, 2000, the Companys common stock traded on the
OTC Bulletin Board under the symbol VTAL. 
The table below reflects the high and low per share closing sale prices
of the Companys common stock as reported by The Nasdaq Stock Market for the
fourth quarter 2000 and, for each of the periods indicated prior to the fourth
quarter of 2000, the high and low closing bid quotations for the Company's
common stock as reported by the OTC Bulletin Board.  Such prices reflect inter-dealer prices, do not include
adjustments for retail mark-ups, markdowns or commissions and may not
necessarily represent actual transactions.

High
  Low2000Fourth Quarter
  $5.94
  $3.44Third Quarter
  6.88
  4.94Second Quarter
  8.63
  5.38First Quarter
  10.94
  4.631999Fourth Quarter
  $5.38
  $3.25Third Quarter
  8.38
  4.00Second Quarter
  8.38
  2.88First Quarter
  4.63
  1.50

The Company has never paid or declared any
cash dividends on its common stock and does not intend to pay dividends on its
common stock in the near future.  To
date, the Company has incurred losses and presently expects to retain its
future anticipated earnings to finance development and expansion of its business.  As of February 28, 2001, there were
approximately 4,000 beneficial owners and approximately 1,200 registered
holders of record of the Company's common stock.

Item 6.SELECTED FINANCIAL DATA

The following selected financial data for
each of the fiscal years in the five-year period ended December 31, 2000 is
derived from the audited financial statements of the Company and the notes
thereto.  The information set forth
below should be read in conjunction with the Company's financial statements,
including the notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," which are included
elsewhere in this Annual Report on Form 10-K.

(In thousands, except per share data)

For the Years Ended
   or As of 
  December 31,
  For the Two Months
  Ended or As of December 31,
  For the Year Ended
  or As of October 31, )2000
  1999
  1998
  1997(1)
  1996(1)
  1996(1)Statements of Operations Data:Revenue
  $10,628
  $6,623
  $4,527
  $1,218
  $65
  $882Gross margin
  8,110
  5,080
  3,302
  915
  53
  720Operating expenses:Selling, general and administrative
  7,861
  5,858
  4,954
  3,871
  328
  1,805Research and development
  3,036
  2,525
  1,815
  2,255
  333
  1,460Operating loss
  (2,787)
  (3,303)
  (3,467)
  (5,211)
  (608)
  (2,545)Net loss
  $(2,637)
  $(3,218)
  $(3,209)
  $(4,774)
  $(521)
  $(2,546)Net loss per share basic and diluted (2)
  $(0.39)
  $(0.64)
  $(0.66)
  $(1.00)
  $(0.11)
  $(0.54)Weighted average common sharesoutstanding basic and diluted(2)
  6,760
  5,046
  4,841
  4,772
  4,745
  4,716Balance Sheets Data:Working capital (deficiency)
  $2,344
  $5,409
  $3,360
  $6,415
  $6,214
  $(258)Total assets
  7,287
  8,666
  5,938
  8,296
  10,493
  943Short and long-term debt
  -
  -
  -
  -
  -
  -Total equity
  3,765
  6,098
  4,134
  7,253
  9,720
  174(1)
  Reflects Vital Images' results as a
  wholly-owned subsidiary of Bio-Vascular from January 1996 through May 12,
  1997.  Vital Images was merged with
  Bio-Vascular in May 1994 in a transaction accounted for as a pooling-of-interests
  and subsequently spun-off as an independent, publicly-owned company in May
  1997.  Results of operations during
  the period from January 1996 through May 12, 1997 include allocations of
  certain general corporate expenses of Bio-Vascular.(2)
  For periods after and including May 12,
  1997, basic and diluted net loss per share is computed using the weighted
  average common shares outstanding during the period.  Common share equivalents are not included
  in the net loss per share calculations since they are anti-dilutive.For periods prior to May 12, 1997, the
  weighted average common shares outstanding used in the net loss per share
  calculation is one-half of the weighted average of Bio-Vascular common shares
  outstanding based on the distribution of one share of the Company's common
  stock for each two shares of Bio-Vascular's common stock.

Item 7.MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Vital
Images develops, markets and supports 3D medical imaging software for use primarily
in disease screening, clinical diagnosis and therapy planning.  The Companys software applies proprietary
computer graphics and image processing technologies to a wide variety of data
supplied by computed tomography (CT) scanners, magnetic resonance (MR)
imaging devices and ultrasound scanning equipment.  Vital Images products allow clinicians to create both two- and
three-dimensional views of human anatomy and to non-invasively navigate within
these images to better visualize and understand internal structures and
pathologies.  The Company believes that
its high-speed visualization technology and customized protocols
cost-effectively brings 3D visualization and analysis into the routine,
day-to-day practice of medicine.  The
Company, which operates in a single business segment, markets its products to
healthcare providers and to manufacturers of diagnostic imaging systems through
a direct sales force in the United States and independent distributors in
international markets.

On October 28, 1996, the Board of Directors
of Bio-Vascular, Inc. ("Bio-Vascular"), the former parent company of
Vital Images, approved a plan to spin off and establish Vital Images as an
independent, publicly-owned company.  On
May 12, 1997 (the "Distribution Date"), Bio-Vascular distributed all
of the shares of Vital Images to the shareholders of Bio-Vascular (the
"Distribution"), and on that date Vital Images began operating as an
independent public company.  All
Bio-Vascular shareholders of record as of May 5, 1997 received one share of
Vital Images common stock for each two shares of Bio-Vascular stock held on
that date, and cash in lieu of fractional shares.  Vital Images common stock is currently traded on The Nasdaq
SmallCap Market under the symbol VTAL.

Revenue

Total
revenue increased 60% to $10,628,000 in 2000 compared with $6,623,000 in
1999.  Total revenue in 1999 increased
46% from total revenue of $4,527,000 in 1998. 
These increases were primarily the result of volume increases in
shipments of Vitreaâ2, the Companys
flagship 3D medical imaging software. 
Software and hardware revenue from the Vitrea 2 platform totaled
$8,963,000, or 84% of total revenue in 2000, compared with $5,143,000, or 78%
of total revenue in 1999, and $3,234,000, or 71% of total revenue in 1998.  Vitrea 2 software and hardware revenue
increased 70% in 2000 compared with 1999 and 59% in 1999 compared with 1998. In
addition, there  was a $620,000 increase
in maintenance and service revenue related to Vitrea 2 sales in 2000 as
compared with 1999 and there was also a $388,000 increase in 1999 compared with
1998.  Royalties received from the
Companys license agreement with Paradigm Geophysical Corporation (Paradigm)
decreased in 2000 as compared to 1999 and decreased in 1999 compared to
1998.  Revenue received under the
license agreement with Paradigm was $210,000, $462,000 and $618,000 in 2000,
1999 and 1998, respectively.  License
fee revenue and maintenance revenue from VoxelViewÒsoftware, the Companys product for the
research market, decreased from $269,000 in 1999 to $89,000 in 2000 and was
flat in 1999 as compared to 1998.

Gross Margin

The Companys gross margin percentage was
down slightly to 76% in 2000 from 77% in 1999. The gross margin percentage was
73% in 1998. The Vitrea 2 system, consisting of Vitrea 2 software and
third-party hardware and peripherals, is designed to offer end users an
integrated 3D medical imaging system. 
The Company receives only a nominal discount in purchasing the
third-party hardware and peripheral components of the Vitrea 2system, and the
Company's gross margin on the resale of these system components approximates
its discount.  The Company anticipates
that hardware revenue related to the sale of Vitrea 2 software will
continue to account for a significant proportion of the Company's total revenue
and therefore, the overall gross margin percentage will continue to approximate
the results of 2000.

Sales and Marketing

Sales and marketing expenses were $5,651,000,
or 53% of total revenue, $3,886,000, or 59% of total revenue, and $2,955,000,
or 65% of total revenue, for 2000, 1999 and 1998, respectively. The increase in
expenses from 1999 to 2000 was primarily due to additional personnel, increased
compensation costs as a result of increased sales commissions and increased
travel expenses related to selling and promoting the Vitrea 2 product.  There were also advertising and promotional
costs during 2000 that increased the marketing expenses over 1999. The increase
in expenses from 1998 to 1999 was primarily due to increased compensation costs
as a result of additional personnel and sales commissions.  There were also increases from 1998 to 1999
in travel expenses as well as advertising and promotion expenses related to selling
and promoting the Vitrea 2 product.  Depreciation expense also increased in 2000 as compared with 1999
and in 1999 as compared with 1998, primarily due to equipment purchases used
for the additional personnel and equipment for tradeshows and, in 2000, the
addition of furniture and fixtures at the Companys new leased facilities.
During these periods, sales and marketing expenses as a percentage of revenue
declined primarily due to the Companys ability to leverage these expenses into
more significant revenue.  The Company
expects sales and marketing costs to increase in future periods primarily as a
result of having a full year of expenses related to employees hired in 2000.

Research and
Development

Research and development expenses were up 20%
to $3,036,000, or 29% of total revenue, in 2000 from $2,525,000, or 38% of
total revenue, in 1999. The increase in expenses was primarily due to increased
compensation costs as a result of additional personnel. Research and
development expenses were $1,815,000, or 40% of total revenue, in 1998.  The increase from 1998 to 1999 was primarily
due to a $285,000 decrease in the amount of engineering costs reimbursed
pursuant to a software development contract with ATL Ultrasound, Inc. (ATL)
and an increase in compensation and recruiting costs due to the hiring of
additional personnel. There was also an increase in depreciation expense in
2000, 1999 and 1998 primarily as the result of equipment purchases to support
the additional personnel. The decreases in research and development expenses as
a percentage of revenue during these periods reflects the Companys ability to
generate increasing revenue resulting from its product development efforts. The
Company anticipates that research and development expenses will increase in
future periods as additional releases of Vitrea 2 software are developed.

General and
Administrative

General and administrative expenses were
$2,210,000, or 21% of total revenue, $1,971,000, or 30% of total revenue and
$1,999,000, or 44% of total revenue, in 2000, 1999 and 1998, respectively. The
increase from 1999 to 2000 was due to increases in compensation costs, legal
fees for patent work and additional SEC filings, and shareholder communication
costs and, in 2000, higher depreciation expense due to the addition of
furniture and equipment at the Companys new leased facilities. The decrease
from 1998 to 1999 was primarily due to the absence of costs in 1999 related to
the resignation of the Companys former Chief Executive Officer and the
decrease of expenses related to the closing of the Companys Iowa facility,
primarily due to negotiating an early termination of the lease for that
facility.  These decreases were
partially offset by increases in shareholder communications and compensation
costs. The decreases in general and administrative expenses as a percentage of
revenue during these periods reflects the Companys ability to limit operating
costs while increasing revenue. The Company believes that general and
administrative costs will increase in future periods primarily due to increased
compensation expense for new employees.

Results
of Operations

The increasing revenue from Vitrea 2
shipments and related service revenue, net of the increased expenses
attributable to the development of the Company's infrastructure and the
development and promotion of the Vitrea 2product, resulted in an operating
loss of $2,787,000 for 2000 compared with an operating loss of $3,303,000 for
1999 and an operating loss of $3,467,000 for 1998.

Interest Income

There was $162,000 of interest income for
2000, compared with $91,000 in 1999 and $264,000 in 1998. The increase in
interest income from 1999 to 2000 was due to an increase in cash from the
Companys private placement of common stock in December 1999. The decrease in
interest income from 1998 to 1999 was due to a lower balance of cash, cash
equivalents and marketable securities throughout the year as a result of the
use of cash to fund the Companys operations.

Income Taxes

The income tax provisions for 2000, 1999 and
1998 consist solely of certain state minimum fees.  As a result of the Companys history of generating net operating
losses, the Company has established a valuation allowance to completely reserve
for the deferred tax assets of the Company.

Liquidity and Capital
Resources

As
of December 31, 2000, the Company had $2,291,000 in cash and cash equivalents,
working capital of $2,344,000 and no material borrowings.  The Company has a collateralized line of
credit agreement with a bank for $1,000,000. 
Borrowings under the agreement are limited to the lower of $1,000,000 or
the Companys borrowing base, which consists of a specified percentage of
certain accounts receivable.  The
Company is also required to maintain a cash and cash equivalents balance of at
least $1,000,000 at the lending bank. 
As of December 31, 2000, the Companys available borrowings under the
agreement were $1,000,000.

Cash
used in operations decreased to $1,961,000 for 2000 from $3,064,000 in 1999.
For 1998, $2,342,000 of cash was used in operations. Cash flows were used
primarily to fund operating losses in each of the years 2000, 1999 and 1998,
which were partially offset by non-cash expenses for depreciation and
amortization and the provision for uncollectible accounts receivable in 2000,
1999 and 1998.  Increases in accounts receivable
reduced cash flows while increases in current liabilities increased cash flows
in each of the years 2000, 1999 and 1998. 
Increases in deferred revenue also resulted in increased cash flows in
2000, 1999 and 1998.

The
increases in current liabilities in 2000, 1999 and 1998 were due primarily to
increases in accounts payable and accrued payroll and other liabilities.  The increases in accounts receivable and
accounts payable were due primarily to volume increases in Vitrea 2 sales and costs
related thereto, respectively.  The
increases in accrued payroll and other liabilities in 2000, 1999 and 1998 were
primarily due to increases in accrued vacation due to increases in headcount
and increases in commissions as a result of increased revenue.

Net
investing activities used $1,384,000 of cash in 2000 due to additions of
property and equipment primarily due to the move to new office facilities in
2000 and equipment for additional headcount. Net investing activities provided
$1,474,000 and $3,555,000 of cash in 1999 and 1998, respectively, primarily due
to the conversion of marketable securities into cash. The Company added
property and equipment of $512,000 and $423,000 in 1999 and 1998, respectively,
primarily for computer equipment to accommodate the increases in employee
headcount.

Cash
provided by financing activities totaled $303,000, $5,171,000 and $91,000 in
2000, 1999 and 1998, respectively.  A
private placement of the Companys common stock and warrants completed by the
Company in December 1999 was primarily responsible for the cash provided by
financing activities in 1999. During 2000, 1999 and 1998, net cash of $303,000,
$426,000 and $91,000, respectively, was provided by proceeds from the exercise
of stock options.

The Company has never paid ordeclared any
cash dividends and does not intend to pay dividends in the near future. The
Company expects to use cash in the near term as it continues to develop the
infrastructure to support its business and develop the market for its products.

Management
believes that its cash, cash equivalents and borrowings available under the
credit agreement should be sufficient to satisfy its cash requirements for at
least the next twelve months.

Foreign Currency Transactions

Substantially all of the Company's foreign
transactions are negotiated, invoiced and paid in U.S. dollars.

Inflation

Management believes inflation has not had a
material effect on the Company's operations or on its financial condition.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities.  This statement establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities. SFAS No. 133, as
amended by SFAS Nos. 137 and 138, is required to be adopted by the Company
effective January 1, 2001. The Company does not expect SFAS No. 133, as
amended, to materially affect its financial position or results of operations.

The Securities and Exchange Commission issued
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements, in December 1999.  SAB No.
101, as amended, provides further interpretive guidance for publicly traded
companies in applying generally accepted accounting principles to revenue
recognition in financial statements. The Company adopted SAB No. 101 in the
fourth quarter of 2000. The adoption of SAB No. 101 had  no effect on the Companys financial
position or results of operations.

Market Risk

The Company is exposed to market risk related
to changes in the fair value of its financial instruments due to changes in
interest rates.  The Company does not
have any foreign subsidiaries and substantially all of the Companys
transactions are denominated in U.S. dollars.

Forward-Looking
Statements

This Annual Report on Form 10-K contains
certain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and information that is based on managements
beliefs as well as on assumptions made by, and upon information currently
available to, management.  When used in
this Annual Report on Form 10-K, the words expect, anticipate, intend,
plan, believe, seek, and estimate, or similar expressions are intended
to identify such forward-looking statements. 
However, this Annual Report on Form 10-K also contains other forward-looking
statements.  Forward-looking statements
are not guarantees of future performance and are subject to certain risks,
uncertainties and assumptions, including, but not limited to, the following
factors, which could cause the Companys future results and shareholder values
to differ materially from those expressed in any forward-looking statements
made by or on behalf of the Company: the dependence on market growth of the
industry in which the Company operates; the extent to which the Companys products
gain market acceptance; the need for and availability of additional capital;
the potential for litigation regarding patent and other intellectual property
rights; the introduction of competitive products by others; dependence on major
customers; fluctuations in quarterly results; the progress of product
development; the availability of third party reimbursement; and the receipt and
timing of regulatory approvals and other factors detailed from time to time in
the Companys filings with the Securities and Exchange Commission, including
those set forth under the heading Important Factors included in Item 1 of
this Annual Report on Form 10-K.

Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA

The Companys financial statements,
supplemental schedule and Report of Independent Accountants thereon, all of
which are included in this Annual Report on Form 10-K, are listed in Item 14
(a) (1) of this Form 10-K.Item 9.CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.PART
III

Item 10.DIRECTORS AND EXECUTIVE OFFICERS OF
REGISTRANT

(a)  Directors of the
Registrant.The information under the caption Election of Directors in the
Company's 2001 Proxy Statement is incorporated herein by reference.(b)  Executive officers of the
Registrant.Information concerning Executive Officers of the Company is included in
this Report under Item 1, Executive Officers of the Registrant.(c)  Compliance with 16(a) of
the Securities Exchange Act of 1934.The information under the caption Compliance with Section 16 (a) in
the Company's 2001 Proxy Statement is incorporated herein by reference.Item 11.EXECUTIVE COMPENSATION

The information under the caption Executive
Compensation and Director Compensation in the Company's 2001 Proxy Statement
is incorporated herein by reference.Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT

The information under the caption Beneficial
Ownership of Common Stock in the Company's 2001 Proxy Statement is
incorporated herein by reference.

Item 13.CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS

There are no reportable transactions.

PART IV

Item 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K

(a) (1)  The following financial
statements and supplemental schedule of Vital Images, Inc. and Report of
Independent Accountants thereon are included herein:Report of Independent AccountantsBalance Sheets as of December 31, 2000 and 1999Statements of Operations for the years ended December 31, 2000, 1999
and 1998Statements of Shareholders Equity for the years ended December 31,
2000, 1999 and 1998Statements of Cash Flows for the years ended December 31, 2000, 1999
and 1998Notes to Financial StatementsSchedule II. Valuation and Qualifying Accounts(a) (2) Included in Item 14 (a) (1) aboveAll other schedules to the financial statements required by Article 7
of Regulation S-X are not required under the related instructions or are
inapplicable and therefore have been omitted.(a) (3)  LISTING OF EXHIBITSThe Exhibits required to be a part of this Report are listed in the
Index to Exhibits, which follows the Financial Statement Schedule.(b)  REPORTS ON FORM 8-KThe Company had no Current Reports on Form
8-K during the year ended December 31, 2000 or during the period from December
31, 2000 to the date of this Annual Report on Form 10-K.(c)  EXHIBITSIncluded in Item 14 (a) (3) above.

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, in Minneapolis, Minnesota, on the 30th day of March 2001.



VITAL
  IMAGES, INC.By:
  /s/Gregory S. FurnessGregory S. FurnessChief Financial Officer andVice President-Finance(Chief Accounting Officer)Pursuant
to the requirement of the Securities Exchange Act of 1934, this Report has been
signed by the following persons in the capacities and on the dates indicated.

Signature
  Title
  Date/s/Albert Emola
  President, Chief Executive Officer
      and Director
      (Principal Executive Officer)
  March 30, 2001Albert Emola/s/Gregory S. Furness
  Chief Financial Officer,
      Vice President-Finance, Treasurer
      and Secretary
      (Chief Accounting Officer)
  March 30, 2001Gregory S. Furness/s/Douglas M. Pihl
  Chairman of the Board and Director
  March 30, 2001Douglas M. Pihl/s/Vincent J. Argiro
  Chief Technology Officer, Founder
      and Director
  March 30, 2001Vincent J. Argiro/s/James B. Hickey, Jr.
  Director
  March 30, 2001James B. Hickey, Jr
  ./s/Richard W. Perkins
  Director
  March 30, 2001Richard W. Perkins/s/Michael W. Vannier
  Director
  March 30, 2001Michael W. Vannier/s/Sven A. Wehrwein
  Director
  March 30, 2001Sven A. Wehrwein



REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
Vital Images, Inc.:

In
our opinion, the financial statements listed in the index appearing under Item
14(a)(1) present fairly, in all material respects, the financial position of
Vital Images, Inc. (the Company) at December 31, 2000 and 1999, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America.  In addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 14(a)(1) presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related financial statements. 
These financial statements and financial statement schedule are the
responsibility of the Companys management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation.  We believe that our
audits provide a reasonable basis for our opinion.



PricewaterhouseCoopers
LLP
Minneapolis, Minnesota
February 9, 2001

VITAL
IMAGES, INC.BALANCE SHEETS

As of December 31,2000
  1999ASSETSCurrent assets:Cash
  and cash equivalents
  $2,291,107
  $5,332,885Accounts
  receivable, net of allowance for doubtful accounts of $215,000 and
          $93,000 as of December 31,
  2000 and 1999, respectively
  3,024,299
  2,005,114Prepaid
  expenses and other current assets
  441,500
  463,309Total
  current assets
  5,756,906
  7,801,308Property and equipment, net
  1,529,688
  864,479TOTAL
  ASSETS
  $7,286,594
  $8,665,787LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts
  payable
  $1,019,898
  $831,741Accrued
  payroll
  799,975
  539,977Deferred
  revenue
  1,238,344
  758,110Other
  current liabilities
  354,350
  262,183Total
  current liabilities
  3,412,567
  2,392,011Deferred revenue
  109,353
  175,360Total
  liabilities
  3,521,920
  2,567,371CommitmentsShareholders equity:Preferred
  stock: $0.01 par value; 5,000,000 shares authorized; none issued or
          outstanding as of December
  31, 2000 and 1999
  -
  -Common
  stock: $0.01 par value; 20,000,000 shares authorized; 6,823,106
          and 6,695,867 shares issued
  and outstanding as of December 31, 2000
          and 1999, respectively
  68,231
  66,959Additional
  paid-in capital
  23,562,444
  23,260,227Accumulated
  deficit
  (19,866,001)
  (17,228,770)Total
  shareholders equity
  3,764,674
  6,098,416TOTAL
  LIABILITIES AND SHAREHOLDERS EQUITY
  $7,286,594
  $8,665,787(The accompanying notes are an integral
  part of the financial statements.)

VITAL IMAGES, INC.STATEMENTS
OF OPERATIONS

For the Years Ended
  December 31,2000
  1999
  1998Revenue:License fees
  $7,037,227
  $4,181,750
  $2,734,783Maintenance and
  services
  1,411,583
  831,196
  511,564Hardware
  2,179,381
  1,610,414
  1,281,004Total
  revenue
  10,628,191
  6,623,360
  4,527,351Cost of revenue:License fees
  238,775
  139,025
  147,387Maintenance and
  services
  385,950
  197,705
  120,989Hardware
  1,893,075
  1,206,846
  956,767Total
  cost of revenue
  2,517,800
  1,543,576
  1,225,143Gross
  margin
  8,110,391
  5,079,784
  3,302,208Operating expenses:Sales and marketing
  5,651,333
  3,886,295
  2,955,317Research and
  development
  3,036,016
  2,524,670
  1,814,602General and
  administrative
  2,209,999
  1,971,435
  1,999,141Total
  operating expenses
  10,897,348
  8,382,400
  6,769,060Operating
  loss
  (2,786,957)
  (3,302,616)
  (3,466,852)Interest income
  161,726
  90,991
  263,668Loss before income taxes
  (2,625,231)
  (3,211,625)
  (3,203,184)Income taxes
  12,000
  6,000
  6,265Net loss
  $(2,637,231)
  $(3,217,625)
  $(3,209,449)Net loss per share  basic and diluted
  $(0.39)
  $(0.64)
  $(0.66)Weighted average common shares  outstanding  basic and diluted
  6,760,233
  5,045,530
  4,840,814(The accompanying notes are an integral
  part of the financial statements.)

VITAL IMAGES, INC.STATEMENTS OF
SHAREHOLDERS EQUITY

Common Stock
  Additional Paid-In-
  Accumulated
  Total ShareholdersShares
  Amount
  Capital
  Deficit
  EquityBalances as of
  December 31, 1997
  4,806,561
  $48,066
  $18,006,824
  $(10,801,696)
  $7,253,194Cancellation
  of restricted stock
  (2,383)
  (24)
  24
  -
  -Issuance
  of common stock upon
       exercise of stock options
  41,925
  419
  57,391
  -
  57,810Issuance
  of common stock under
       Employee Stock Purchase Plan
  24,394
  244
  32,468
  -
  32,712Net
  and comprehensive loss
  
  
  
  (3,209,449)
  (3,209,449)Balances as of
  December 31, 1998
  4,870,497
  48,705
  18,096,707
  (14,011,145)
  4,134,267Cancellation
  of restricted stock
  (1,881)
  (19)
  19
  -
  -Stockbased
  compensation
  -
  -
  10,781
  -
  10,781Issuance
  of common stock upon
       exercise of stock options
  153,484
  1,535
  358,306
  -
  359,841Issuance
  of common stock under
       Employee Stock Purchase Plan
  23,767
  238
  66,407
  -
  66,645Issuance
  of common stock in
       connection with private placement,
       net of offering costs
  1,650,000
  16,500
  4,728,007
  -
  4,744,507Net
  and comprehensive loss
  
  
  
  (3,217,625)
  (3,217,625)Balances as of
  December 31, 1999
  6,695,867
  66,959
  23,260,227
  (17,228,770)
  6,098,416Issuance
  of common stock upon
       exercise of stock options
  105,650
  1,056
  216,468
  -
  217,524Issuance
  of common stock under 
       Employee Stock Purchase Plan
  21,589
  216
  85,749
  -
  85,965Net
  and comprehensive loss
  
  
  
  (2,637,231)
  (2,637,231)Balances
  as of December 31, 2000
  6,823,106
  $68,231
  $23,562,444
  $(19,866,001)
  $3,764,674(The accompanying notes are an integral part
of the financial statements.)



VITAL IMAGES, INC.STATEMENTS
OF CASH FLOWS

For the Years Ended
  December 31,2000
  1999
  1998CASH FLOWS FROM OPERATING ACTIVITIES:Net
  loss
  $(2,637,231)
  $(3,217,625)
  $(3,209,449)Adjustments
  to reconcile net loss to net cash 
  used in operating activities:Depreciation
  and amortization
  718,978
  563,420
  504,949Stock-based
  compensation
  -
  10,781
  -Provision
  for uncollectible accounts receivable
  122,000
  15,000
  52,313Other
  -
  -
  40,267Changes
  in operating assets and  liabilities:Accounts
  receivable
  (1,141,185)
  (871,005)
  (620,292)Prepaid
  expenses and other  current  assets
  21,809
  (328,192)
  129,709Accounts
  payable
  188,157
  326,481
  301,681Deferred
  revenue
  414,227
  411,004
  109,803Accrued
  payroll and other liabilities
  352,165
  26,518
  349,067Net
  cash used in operating  activities
  (1,961,080)
  (3,063,618)
  (2,341,952)CASH FLOWS FROM INVESTING ACTIVITIES:Additions
  to property and equipment
  (1,384,187)
  (511,661)
  (423,240)Investments
  in marketable securities
  -
  (1,014,444)
  (9,522,092)Maturities
  of marketable securities
  -
  3,000,000
  13,500,000Net
  cash (used in) provided by investing activities
  (1,384,187)
  1,473,895
  3,554,668CASH FLOWS FROM FINANCING ACTIVITIES:Net
  proceeds from private placement
  -
  4,744,507
  -Purchases
  of common stock under  Stock option
  plans
  303,489
  426,486
  90,522Net
  cash provided by financing  activities
  303,489
  5,170,993
  90,522NET (DECREASE) INCREASE IN CASH AND CASH
  EQUIVALENTS
  (3,041,778)
  3,581,270
  1,303,238CASH AND CASH EQUIVALENTS, BEGINNING OF
  YEAR
  5,332,885
  1,751,615
  448,377CASH AND CASH EQUIVALENTS, END OF  YEAR
  $2,291,107
  $5,332,885
  $1,751,615

(The accompanying notes are an integral part
of the financial statements.)

VITAL IMAGES, INC.
NOTES TO FINANCIAL STATEMENTS

(1) Business
Description and Background

Business
Description

Vital
Images develops, markets and supports 3D medical imaging software for use
primarily in disease screening, clinical diagnosis and therapy planning.  The Companys software applies proprietary
computer graphics and image processing technologies to a wide variety of data
supplied by computed tomography (CT) scanners, magnetic resonance (MR)
imaging devices and ultrasound scanning equipment.  Vital Images products allow clinicians to create both two- and
three-dimensional views of human anatomy and to non-invasively navigate within
these images to better visualize and understand internal structures and
pathologies.  The Company believes that
its high-speed visualization technology and customized protocols
cost-effectively bring 3D visualization and analysis into the routine,
day-to-day practice of medicine.  The
Company, which operates in a single business segment, markets its products to
healthcare providers and to manufacturers of diagnostic imaging systems through
a direct sales force in the United States and independent distributors in
international markets.

Background

On
October 28, 1996, the Board of Directors of Bio-Vascular, Inc.
(Bio-Vascular), the former parent company of Vital Images, approved a plan to
spin off and establish Vital Images as an independent, publicly owned company.  On May 12, 1997 (the Distribution Date),
Bio-Vascular distributed all of the shares of Vital Images to the shareholders
of Bio-Vascular (the Distribution), and on that date Vital Images began
operating as an independent public company. 
All Bio-Vascular shareholders of record as of May 5, 1997 received one
share of Vital Images common stock for each two shares of Bio-Vascular stock
held on that date, and cash in lieu of fractional shares.

(2) Summary of
Significant Accounting Policies

Use of Estimates

The
preparation of the Companys financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
as of the date of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. 
Actual results could differ from those estimates.

Financial Instruments

The
Company considers all highly liquid investments acquired with an original
maturity of three months or less to be cash equivalents.  Investments having original maturities in
excess of three months are classified as marketable securities.  Investments are classified as short-term or
long-term on the balance sheet based on their maturity date.  All of the Companys marketable securities
are classified as available-for-sale and all mature in one year or less.  Available-for-sale investments are recorded
at market value, which is based on quoted market prices, with unrealized
holding gains and losses included as a separate component of shareholders
equity.  The Company uses a specific
identification cost method to determine the gross realized gains and losses on
the sale of its securities.



VITAL IMAGES, INC.
NOTES TO FINANCIAL STATEMENTS

Concentration of Credit Risk

Cash
is held primarily by one financial institution.  Cash equivalents and marketable securities are invested in money
market accounts and a limited number of corporate bonds.  The Company's customer base is generally
concentrated with a small base of customers. 
The Company reviews the creditworthiness of its customers prior to
product shipment and generally does not require collateral.

Property and Equipment

Property
and equipment are stated at cost. 
Depreciation is computed using the straight-line method over the related
assets estimated useful life, generally three to seven years.  Leasehold improvements are amortized over
the shorter of their estimated useful lives or the remaining terms of the
related leases.  The asset cost and
related accumulated depreciation or amortization is adjusted for asset
retirement or disposal with the resulting gain or loss, if any, credited or
charged to results of operations.

Revenue Recognition

The
Company recognizes revenue in accordance with AICPA Statement of Position
(SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-4.  Revenue is derived from the licensing of
computer software, sales of system hardware, maintenance and from services
consisting of installation, training and consulting services.

In
software arrangements that include the rights to multiple software products,
system hardware, specified upgrades, maintenance or services, the Company allocates
the total arrangement fee among each deliverable based on the relative fair
value of each of the deliverables determined based on vendor-specific objective
evidence. In software arrangements in which the Company does not have
vendor-specific objective evidence, revenue is deferred until the earlier of
when vendor-specific objective evidence is determined for the undelivered
elements or when all elements have been delivered.

Revenue
from license fees is recognized when persuasive evidence of an agreement
exists, shipment of the product has occurred, no significant Company
obligations with regard to implementation remain, the fee is fixed and
determinable and collection is probable. 
Revenue allocable to maintenance is recognized on a straight-line basis
over the periods in which it is provided. 
The Company evaluates arrangements that include services to determine
whether those services are essential to the functionality of other elements of
the arrangement.  Currently, the
Companys services are not considered essential to the functionality of other
elements, and accordingly, revenue allocable to services is recognized as the
services are performed.  Hardware
revenue is recognized upon shipment when all other revenue recognition criteria
in the arrangement have been met.

Research and
Development Costs

Costs
related to research, design and development of products are charged to research
and development expense as incurred. 
Software development costs are capitalized beginning when a product's
technological feasibility has been established and ending when a product is
available for general release to customers. 
The Company uses the working model approach to determine technological
feasibility.  Generally, the Company's
products are released soon after technological feasibility has been
established.  As a result, the Company
has not capitalized any software development costs, since such costs have not
been significant.



VITAL IMAGES, INC.
NOTES TO FINANCIAL STATEMENTS

Income Taxes

The
Company accounts for income taxes using the asset and liability method.  Deferred income tax assets and liabilities
are determined based on differences between financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.  Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.

Net Loss Per Share

Net
loss per share is computed using the weighted average common shares outstanding
during the period.  Common share
equivalents are not included in the net loss per share calculations since they
are anti-dilutive.  Warrants and options
to purchase 3,889,675, 3,624,561 and 1,440,318 shares of the Companys common
stock were outstanding as of December 31, 2000, 1999 and 1998 respectively, and
could potentially dilute basic earnings per share in future periods, if the
Company generates net income.

Stock-Based Compensation

The
Company has chosen to continue to account for stock options granted to
employees and directors using the intrinsic value method prescribed by APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations.  Accordingly,
compensation cost for stock options granted is measured as the excess, if any,
of the value of the Company's stock as of the date of the grant over option
exercise price.  Such compensation cost
is amortized on a straight-line basis over the underlying vesting term of the
option.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities.  This statement establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities. SFAS No. 133, as
amended by SFAS Nos. 137 and 138, is required to be adopted by the Company
effective January 1, 2001. The Company does not expect SFAS No. 133, as
amended, to materially affect its financial position or results of operations.

The Securities and Exchange Commission issued
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements, in December 1999.  SAB No.
101, as amended, provides further interpretive guidance for publicly traded
companies in applying generally accepted accounting principles to revenue
recognition in financial statements. The Company adopted SAB No. 101 in the
fourth quarter of 2000. The adoption of SAB No. 101 had no effect on the
Companys financial position or results of operations.

VITAL IMAGES, INC.
NOTES TO FINANCIAL STATEMENTS

(3) Supplemental Financial
Statement Information

Cash and Cash Equivalents and Marketable
Securities

December 31,2000
  1999Cash and cash equivalents:Cash
  $1,192,633
  $-Money market funds
  1,098,474
  5,332,885Cash
  and cash equivalents
  $2,291,107
  $5,332,885Cost approximates market for all
classifications of financial instruments. 
Realized gains and losses on marketable securities were not significant
for the years ended December 31, 1999 and 1998.

Property and Equipment

December 31,2000
  1999Equipment
  $2,730,272
  $2,122,651Furniture and fixtures
  795,726
  188,958Computer software
  393,260
  316,274Leasehold improvements
  79,861
  -Total property and
  equipment
  3,999,119
  2,627,883Less accumulated depreciation and
  amortization
  (2,469,431)
  (1,763,404)Property and equipment,
  net
  $1,529,688
  $864,479(4) Line of Credit

In
June 2000, the Company renewed a credit agreement with a bank for a short-term
line of credit for borrowings up to $1,000,000.  Borrowings under the line of credit agreement bear interest at
one-half percent over the prime rate as printed in the Wall Street Journal
(9.50% as of December 31, 2000). 
Borrowings under the agreement are limited to the lower of $1,000,000 or
the Companys borrowing base, which consists of a specified percentage of
certain accounts receivable.  Borrowings
under the agreement are collateralized by substantially all of the Companys
assets.  The line of credit agreement is
renewable on an annual basis and contains certain restrictive covenants, which,
among other things, require the Company to maintain a net worth of at least
$2,000,000 and cash and cash equivalents of at least $1,000,000 at the lending
bank. There were no amounts outstanding under the credit agreement as of
December 31, 2000 and 1999 and the available borrowings were $1,000,000 at
December 31, 2000.

(5) Deferred Revenue

Deferred
revenue consists primarily of deferred licensing and maintenance revenue and is
amortized on a straight-line basis over the term of the arrangement.

VITAL IMAGES, INC.
NOTES TO FINANCIAL STATEMENTS

(6) Lease Commitments

In October 1999, the Company entered into a
non-cancelable office facilities lease in Plymouth, Minnesota commencing on
February 1, 2000 and expiring on July 31, 2005.  Under the terms of the lease the Company is also required to pay
a portion of allocable operating costs.

Total rent expense, including an allocation
of operating costs, was $476,000, $417,000 and $368,000 for the years ended
December 31, 2000, 1999 and 1998, respectively.

Scheduled
minimum lease payments for the next five years are approximately as follows:

Year Ending
  December 31,2001
  $330,0002002
  330,0002003
  347,0002004
  349,0002005
  203,000Total
  $1,559,000



(7) Shareholders
Equity

Stock Option Plans

In
connection with the Distribution, Bio-Vascular, as the sole shareholder of the
Company, approved and adopted several option plans and stand-alone option
grants, which covered employees of both Vital Images and Bio-Vascular.  The adopted plans include the Incentive
Stock Option Adjustment Plan, the 1990 Management Incentive Stock Option Plan,
the 1992 Director Stock Option Adjustment Plan, the 1992 Stock Option Plan, and
the 1995 Stock Incentive Adjustment Plan (collectively, the Mirror Plans).  Each of these plans is intended to mirror
the provisions of a corresponding Bio-Vascular plan that was in effect at the
time of the Distribution.  As each
Bio-Vascular option plan generally provided for the termination of options
following termination of employment, each of the Mirror Plans, as well as each
of the stand-alone option grants (the Mirror Grants), were approved and
adopted to provide that the Distribution would not cause a termination of any
Vital Images employee for the purposes of such plans or option grant, and that
Bio-Vascular options held by Vital Images employees following the Distribution
would remain exercisable following the Distribution, so long as such employees
remain employed by Vital Images or any subsidiary.  Similar provisions were also adopted with respect to Vital Images
options held by Bio-Vascular employees. 
On the Distribution Date, 608,534 options were issued in connection with
the Mirror Plans and the Mirror Grants (collectively, the Mirror
Options).  These options have vesting
periods ranging from less than one year up to four years and terms ranging from
less than one year up to ten years.  No
additional grants may be made pursuant to any of the Mirror Plans.

VITAL IMAGES, INC.
NOTES TO FINANCIAL STATEMENTS

In
May 1997, Bio-Vascular, as the sole shareholder of the Company, approved and
adopted the Vital Images, Inc. 1997 Stock Option and Incentive Plan (the Stock
Option Plan), which became effective on the Distribution Date.  Under the terms of the plan, the Board of
Directors may grant options and other stock-based awards to key employees to
purchase shares of the Companys common stock at an option exercise price equal
to or greater than 85% of the fair market value on the date of grant.  The options are exercisable at such times,
in installments or otherwise, as the Board of Directors may determine.  Generally, these options are incentive stock
options with a term of eight years and are exercisable to 28% of the total
grant one year after the date of grant and 2% per month thereafter.  In May 2000, the shareholders of the Company
approved an increase of 500,000 common shares, bringing the total number of
shares of common stock that may be issued or awarded under the Stock Option
Plan to 1,925,000.  As of December 31,
2000, there are 458,516 shares available for grant under the Stock Option Plan.

Also
in May 1997, Bio-Vascular, as the sole shareholder of the Company, approved and
adopted the Vital Images, Inc. 1997 Director Stock Option Plan (the Director
Plan) (together with the Stock Option Plan, the 1997 Plans), which became
effective on the Distribution Date.  The
Director Plan provides non-employee directors with automatic grants of stock
options, and allows the Board of Directors to make additional discretionary
option grants to any or all directors. 
Options that are granted under the Director Plan are generally granted
with an option price equal to the fair market value on the date of grant, with
a term of eight years, are non-qualified options and become exercisable in
three equal annual installments beginning on the first occurring December 31
after the date of grant.  In May 1999,
the shareholders of the Company approved an increase of 105,000 common shares,
bringing the total number of shares of common stock that may be issued or
awarded under the Director Plan to 210,000. 
In May 2000, the shareholders of the Company approved an increase to the
number of shares subject to automatic option grant to current and future
non-employee directors from 15,000 shares to 18,000 shares. As of December 31,
2000, there are 43,000 shares available for grant under the Director Plan.

Certain
non-plan options were granted to certain officers of the Company in 1998 and
1999.  In February 1998, the Company
reserved and granted 300,000 non-qualified, non-plan options to an officer of
the Company.  These non-plan options
have a term of eight years, vest over a two year period and were granted at
exercise prices at least equal to fair market value of the Companys common
stock on the date of grant.  In December
1999, 100,000 of these non-plan options were canceled.  In December 1999, the Company reserved an
additional 75,000 and granted an additional 175,000 non-qualified, non-plan
options to another officer of the Company. 
These non-plan options have a term of eight years, are exercisable to
28% of the total grant one year after the date of grant and 2% per month
thereafter and were granted at exercise prices at least equal to fair market
value of the Companys common stock on the date of grant.

In
December 2000, the Company granted 10,000 options to a non-employee consultant.
These non-plan options have a term of eight years and were granted at exercise
prices at least equal to fair market value of the Companys common stock on the
date of grant. 5,000 of the options vest over a four-year period and the
remaining 5,000 options will vest immediately when a specified milestone is
achieved. The Company records compensation expense related to this arrangement
based upon the fair values of the options during the periods the consultant
provides services. Such fair values are measured using the Black-Scholes
option-pricing model. The fair value of the options was approximately $19,000
at December 31, 2000. There was no significant compensation expense to the
Company in 2000.

VITAL IMAGES, INC.
NOTES TO FINANCIAL STATEMENTS

The
following table summarizes stock option activity for 2000, 1999 and 1998:

Shares Under Option
  Weighted-Average Exercise Price Per ShareTotal outstanding as of December 31,
  1997
  947,018
  $2.66Options granted
  731,000
  2.06Options exercised
  (41,925)
  1.38Options canceled
  (195,775)
  2.30Total outstanding as of December 31,
  1998
  1,440,318
  2.44Options granted
  693,750
  4.22Options
  exercised
  (153,484)
  2.34Options canceled
  (169,674)
  3.60Total outstanding as of December 31, 1999
  1,810,910
  3.02Options granted
  482,750
  6.83Options exercised
  (105,650)
  2.06Options canceled
  (111,986)
  4.56Total outstanding as of December 31, 2000
  2,076,024
  $3.87Options exercisable as of:December 31, 1998
  654,850
  $2.59December 31, 1999
  847,640
  $2.41December 31, 2000
  1,125,409
  $2.87

Various
price ranges and weighted average information for options outstanding as of December
31, 2000 are as follows:

Outstanding Options
  Exercisable OptionsRange
  of Exercise Prices
  Number Outstanding
  as of Dec 31, 2000
  Weighted Average
  Remaining Contractual Life
  Weighted Average
  Exercise Price
  Number Exercisable
  as of Dec 31, 2000
  Weighted Average
  Exercise Price$1.13  2.00
  332,405
  4.49
  years
  $1.36
  279,115
  $1.362.16  2.38
  440,513
  4.82
  years
  2.33
  382,873
  2.332.59  3.87
  371,254
  6.26
  years
  3.36
  171,914
  3.134.09  4.75
  504,606
  6.24
  years
  4.62
  257,011
  4.645.13  7.63
  427,246
  7.24
  years
  6.96
  34,496
  6.772,076,024
  
  
  1,125,409

VITAL IMAGES, INC.
NOTES TO FINANCIAL STATEMENTS

Employee Stock Purchase
Plan

The
1997 Employee Stock Purchase Plan (the ESPP) was approved and adopted by
Bio-Vascular, as the sole shareholder of the Company, in May 1997.  The ESPP, which became effective on July 1,
1997, enables eligible employees to purchase the Companys common stock at 85%
of the fair market value of the stock on the date an offering commences or on
the date an offering terminates, whichever is lower.  The ESPP covers an aggregate of up to 250,000 shares of common
stock that can be issued and sold to participating employees of the Company
through a series of three-month offerings, beginning July 1, 1997.  The ESPP covers substantially all employees,
subject to certain limitations.  Each
employee may elect to have up to 10% of his or her base pay withheld and
applied toward the purchase of shares in each such offering.  Purchases under the ESPP for 2000 were
21,589 shares generating proceeds to the Company of $85,965 at an average
purchase price of $3.99; for 1999 there were 23,767 shares purchased,
generating proceeds to the Company of $66,645 at an average purchase price of
$2.80; and for 1998 there were 24,394 shares purchased, generating proceeds to
the Company of $32,712 at an average purchase price of $1.34.  As of December 31, 2000, there are 164,474
shares of common stock reserved for purchases under the ESPP.

Stock-Based Compensation

If
compensation cost for the Mirror Options, the ESPP, the Stock Option Plan, the
Director Plan and the non-plan options had been determined based on the fair
values on the grant dates for awards in 2000, 1999 and 1998 consistent with the
provisions of SFAS No. 123, the Companys net loss and net loss per share for
2000, 1999 and 1998 would have been increased to the pro forma amounts
indicated below:


For the Years Ended
  December 31,2000
  1999
  1998Net loss
  As reported
  $(2,637,231)
  $(3,217,625)
  $(3,209,449)Pro forma
  $(3,570,000)
  $(3,745,000)
  $(3,647,000)Net loss per share -
  As reported
  $(0.39)
  $(0.64)
  $(0.66)basic and diluted
  Pro forma
  $(0.53)
  $(0.74)
  $(0.75)The weighted average fair values of options
  granted were:Options under the 1997 Plans
  $5.43
  $3.47
  $1.28Options under ESPP
  $0.70
  $0.50
  $0.24Non-plan options
  $3.66
  $2.80
  $0.60Mirror Options
  $-
  $-
  $-The
weighted average fair values for the Mirror Options, the 1997 Plans and the
non-plan options were based on the fair values on the dates of grant.  The fair values of options under the ESPP
were based on the 15 percent purchase discount.  The fair values for the Mirror Options, the 1997 Plans and the
non-plan options were calculated using the Black-Sholes option-pricing model
with the following weighted average assumptions:

For the Years Ended
  December 31,2000
  1999
  1998Expected option life
  6.0 years
  6.0 years
  5.2 yearsExpected volatility factor
  92.6 %
  91.7 %
  88.7 %Expected divided yield
  0 %
  0 %
  0 %Risk-free interest rate
  6.40 %
  5.97 %
  5.53 %



VITAL
IMAGES, INC.NOTES TO FINANCIAL STATEMENTS

The
pro forma effects on the net losses for 2000, 1999 and 1998 are not necessarily
representative of the pro forma effect that may occur on the net income (loss)
in future periods.

Warrants

In
December 1999, the Company completed a private placement of 1,650,000 units at
$3.25 per unit.  Each unit consisted of
one share of the Companys common stock and a redeemable, five-year warrant to
purchase an additional share of common stock at $3.75 per share.  The warrants are immediately exercisable and
expire in December 2004.  The warrants
may be redeemed by the Company at any time before December 2004 at a redemption
price of $.01 per warrant, upon notice of such redemption, provided that (i)
the closing bid price of the Companys common stock exceeds $5.75 per share for
any thirty consecutive trading days prior to such notice and (ii) a
registration statement covering the resale of the warrant shares has been filed
by the Company with the Securities and Exchange Commission and is effective as
of the date of such notice. The Company satisfied the conditions for redemption
of the warrants as of December 7, 2000.

The
Company also issued warrants to the underwriter in the private placement to
purchase 163,651 shares of the Companys common stock at $3.25 per share.  The warrants are immediately exercisable and
expire in December 2004.

None
of the warrants have been exercised as of December 31, 2000.

Restricted Stock

Under
certain compensation agreements, an arrangement which provides for awards of
restricted common stock to key management was adopted by Bio-Vascular in
1992.  Pursuant to the agreement
governing the Companys spin-off from Bio-Vascular (the Distribution Agreement),
Vital Images assumed its proportionate share of obligations represented by such
restricted shares such that the Company issued 25,375 restricted shares on the
Distribution Date in connection with the spin-off from Bio-Vascular.  As of December 31, 2000, no shares of
restricted stock remain unearned by certain key Bio-Vascular employees.

Rights Plan

In
April 1997, the Company declared a dividend distribution of one Preferred Stock
Purchase Right for each outstanding share of the Companys common stock (the
Rights).  With certain exceptions, the
Rights become exercisable only in the event that (i) an acquiring party
accumulates 15% or more of the Companys common stock, (ii) a party announces
an offer to acquire 15% or more of the Companys common stock, or (iii) the
acquisition of a substantial amount of the Companys common stock by a person
whom the Board of Directors has determined is an Adverse Person as defined in
the underlying Rights Agreement.  Each Right
entitles the holder to purchase one-thousandth of a share of the Companys
Series A Junior Preferred Stock at a price of $20.00 (the Exercise
Price).  If a person or group becomes
the beneficial owner of 15% or more of the Companys common stock or the Board
of Directors determines that a person is an Adverse Person, each holder of a
Right shall thereafter have the right to receive preferred stock having a fair
market value equal to two times the Exercise Price.  Upon the occurrence of certain mergers, combinations or
acquisitions of the Companys assets, each holder of a Right shall thereafter
have the right to receive that number of shares of common stock of the
acquiring company which equals the Exercise Price of the Right divided by
one-half of the current market price of such common stock as of the date of the
occurrence of the event.  The Company is
generally entitled to redeem the Right at $.001 per Right at any time until ten
days following the acquisition of 15% or more of the Companys common stock or
ten days after the point at which the Companys Board of Directors determines
that a person is an Adverse Person, as defined by the Rights Agreement.  The Rights expire on April 30, 2007, if not
previously redeemed or exercised.

VITAL IMAGES, INC.
NOTES TO FINANCIAL STATEMENTS

(8) Income Taxes

The
income tax provision for each of the periods presented represents state minimum
taxes.  As of December 31, 2000, the
Company has net operating loss carryforwards of approximately $16,500,000 for
federal income tax reporting purposes and unused research and development
credits of approximately $662,000, which expire in varying amounts from 2004 to
2020.  For financial reporting purposes,
a valuation allowance has been established to completely reserve for the
Companys deferred tax assets related to those carryforwards.

As
a result of Bio-Vasculars acquisition of the Company in May 1994, the Company
experienced an ownership change as defined by Section 382 of the Internal
Revenue Code (the Code).  Under the
Code, the amount of pre-acquisition net operating loss carryforwards and
research and development credits that can be used to offset future taxable
income and income taxes will be limited. 
As of the date of the Companys acquisition by Bio-Vascular, the Company
had approximately $1,600,000 of net operating loss carryforwards and
approximately $137,000 of research and experimentation credits, both of which
will be subject to limitation under the Code.

The
significant components of the Company's tax-effected net deferred tax assets,
based on an assumed effective tax rate of 40%, are:

December 31,2000
  1999Net operating loss carryforwards
  $6,600,000
  $5,649,000Research and development tax credit
  carryforwards
  662,000
  542,000Deferred compensation
  230,000
  230,000Other, net
  382,000
  226,000Net deferred tax assets before
  valuation allowance
  7,874,000
  6,647,000Less valuation allowance
  (7,874,000)
  (6,647,000)Net deferred tax assets
  $-
  $-VITAL IMAGES, INC.
NOTES TO FINANCIAL STATEMENTS

(9) Major Customers and Geographic Data

Customers accounting for more than 10 percent
of the Companys total revenue are as follows:

Significant
  Customer
  Revenue
  Percentage of Total
  RevenueYear ended December 31, 2000
  Toshiba America  
  Medical Systems, Inc.
  $2,819,000
  27%Year ended December 31, 1999
  Toshiba America  
  Medical Systems, Inc.
  $1,377,000
  21%Year ended December 31, 1998
  Toshiba America  
  Medical Systems, Inc.
  $1,020,000
  23%Paradigm Geophysical  Corporation
  $618,000
  14%In August 1995, the Company entered into a
source code license agreement with Paradigm Geophysical Corporation
("Paradigm") granting Paradigm a worldwide, exclusive license for use
in oil and gas exploration applications. 
Under the agreement, Paradigm became both the exclusive developer and marketer
of VoxelGeoÒ.  The Company receives royalty payments based
upon cash collections through January 1, 2001 from sales of VoxelGeo
software by Paradigm.  During 2000, 1999
and 1998, the Company received royalty payments of $210,000, $462,000 and
$618,000, respectively.

The Companys accounts receivable is
generally concentrated with a small base of customers.  As of December 31, 2000, two customers, each
accounting for more than 10% of accounts receivable, accounted for 27% of accounts
receivable, while as of December 31, 1999, two customers, each accounting for
more than 10% of accounts receivable, accounted for 28% of accounts receivable.

Export revenue accounted for 7%, 8% and 7% of
total revenue for the years ended December 31, 2000, 1999 and 1998, respectively.  Substantially all of the Companys export
sales are negotiated, invoiced and paid in U.S. dollars.

Export sales by geographic area are
summarized as follows:

For the Years Ended December 31,2000
  1999
  1998Europe
  $389,000
  $312,000
  $222,000Asia
  and Pacific Region
  195,000
  133,000
  77,000Latin
  America
  108,000
  42,000
  -Other
  foreign countries
  44,000
  22,000
  8,000VITAL IMAGES, INC.
NOTES TO FINANCIAL STATEMENTS

(10) Employee Benefit
Plan

The Company maintains the Vital Images, Inc.
Salary Savings Plan (the Plan), which is intended to qualify under Section
401(k) of the Internal Revenue Code, as amended.  The Plan covers substantially all employees.  Each employee may elect to contribute to the
Plan through payroll deductions of up to 25% of his or her salary, subject to
certain limitations.  At the discretion
of the Board of Directors, the Company may make matching contributions equal to
a percentage of the salary reduction contributions or other discretionary
amounts.  There were no contributions to
the Plan by the Company in 2000, 1999 and 1998.

SCHEDULE II

VITAL IMAGES, INC.
VALUATION AND QUALIFYING ACCOUNTS

Description
  Balance as of
  Beginning of Period
  Charges to Cost and
  Expenses
  Deductions
  Balance as of End
  of PeriodAllowance for doubtful accounts:Year ended December 31,
  2000
  $93,000
  $122,000
  $-
  $215,000Year ended December 31,
  1999
  $78,000
  $15,000
  $-
  $93,000Year ended December 31,
  1998
  $40,000
  $52,313
  $14,313
  $78,000

VITAL IMAGES, INC.

FORM 10-K

INDEX TO EXHIBITS



Item No.
  Description3.1
  Articles of Incorporation of the Company
  (incorporated by reference to Exhibit 3.1 to the Companys registration
  statement on Form 10 (File No. 0-22229)).3.2
  By-laws of the Company (incorporated by
  reference to Exhibit 3.2 to the Companys registration statement on Form 10
  (File No. 0-22229)).4.1
  Form of common stock Certificate of the
  Company (incorporated by reference to Exhibit 4.3 to the Companys
  registration statement on Form 10 (File No. 0-22229)).4.2
  Rights Agreement, dated effective as of May
  1, 1997 between the Company and American Stock Transfer and Trust Company,
  which includes as Exhibit B the form of Rights Certificate (incorporated by
  reference to Exhibit 4.4 to the Companys registration statement on Form 10
  (File No. 0-22229)).4.3
  Certificate of Designation, Preferences and
  Rights of Series A Junior Preferred Stock of the Company (incorporated by
  reference to Exhibit 4.5 to the Companys registration statement on Form 10
  (File No. 0-22229)).10.1
  Form of Distribution Agreement, effective
  as of May 2, 1997 between Bio-Vascular, Inc. and the Company (incorporated by
  reference to Exhibit 10.1 to the Companys registration statement on Form 10
  (File No. 0-22229)).10.2
  Form of Employee Benefits Agreement,
  effective as of May 2, 1997, between Bio-Vascular, Inc. and the Company
  (incorporated by reference to Exhibit 10.2 to the Companys registration
  statement on Form 10 (File No. 0-22229)).10.3
  Form of Tax Sharing Agreement, effective as
  of May 2, 1997, between Bio-Vascular, Inc. and the Company (incorporated by
  reference to Exhibit 10.3 to the Companys registration statement on Form 10
  (File No. 0-22229)).10.4
  Form of Transition Services Agreement,
  effective as of May 2, 1997 between Bio-Vascular, Inc. and the Company
  (incorporated by reference to Exhibit 10.4 to the Companys registration
  statement on Form 10 (File No. 0-22229)).10.5
  Incentive Stock Option Adjustment Plan
  (incorporated by reference to Exhibit 10.5 to the Companys registration
  statement on Form 10 (File No. 0-22229)).10.6
  1990 Stock Option Plan (incorporated by
  reference to Exhibit 10.6 to the Companys registration statement on Form 10
  (File No. 0-22229)).10.7
  1992 Stock Option Plan (incorporated by
  reference to Exhibit 10.7 to the Companys registration statement on Form 10
  (File No. 0-22229)).10.8
  1992 Director Stock Option Adjustment Plan
  (incorporated by reference to Exhibit 10.8 to the Companys registration
  statement on Form 10 (File No. 0-22229)).10.9
  1995 Stock Incentive Adjustment Plan
  (incorporated by reference to Exhibit 10.9 to the Companys registration
  statement on Form 10 (File No. 0-22229)).10.10
  Employee Stock Purchase Plan (incorporated
  by reference to Exhibit 10.10 to the Companys registration statement on Form
  10 (File No. 0-22229)).10.11
  1997 Stock Option and Incentive Plan
  (incorporated by reference to Exhibit 10.11 to the Companys registration
  statement on Form 10 (File No. 0-22229)).10.12
  1997 Director Stock Option Plan
  (incorporated by reference to Exhibit 10.12 to the Companys registration
  statement on Form 10 (File No. 0-22229)).10.13
  License Agreement dated August 25, 1995
  between the Company and Paradigm Geophysical Corporation (formerly CogniSeis
  Development, Inc.) (incorporated by reference to Exhibit 10.14 to the
  Companys registration statement on Form 10 (File No. 0-22229)).10.14
  Lease agreement dated May 14, 1993, as
  amended April 15, 1997, between Vital Images, Inc. and Douglas Green IRA
  Trust (incorporated by reference to Exhibit 10.15 to the Companys
  registration statement on Form 10 (File No. 0-22229)).10.15
  Lease Agreement dated January 31, 1997
  between ACKY  3100 Lake Limited Partnership and the Company (incorporated by
  reference to Exhibit 10.16 to the Companys registration statement on Form 10
  (File No. 0-22229)).10.16
  Form of Change in Control Agreement between
  the Company and Andrew M. Weiss, Vincent J. Argiro, Ph.D., David A. Davis,
  Gregory S. Furness and Jay D. Miller (incorporated by reference to Exhibit
  10.17 to the Companys registration statement on Form 10 (File No. 0-22229)).10.17
  Joint Development Agreement dated August
  14, 1996 between the Company and ATL Ultrasound, Inc.* (incorporated by reference
  to Exhibit 10.18 to the Companys registration statement on Form 10 (File No.
  0-22229)).10.18
  Sales and Marketing Agreement dated August
  14, 1996 between the Company and ATL Ultrasound, Inc.* (incorporated by
  reference to Exhibit 10.19 to the Companys registration statement on Form 10
  (File No. 0-22229)).10.19
  Software License Agreement dated August 1,
  1997 between the Company and Duke University (incorporated by reference to
  Exhibit 10.20 to the Companys Annual Report on Form 10-K for the year ended
  December 31, 1997 (File No. 0-22229)).10.20
  Severance Agreement dated February 13, 1998
  between the Company and Mr. Weiss (incorporated by reference to Exhibit 10.21
  to the Companys Annual Report on Form 10-K for the year ended December 31, 1997
  (File No. 0-22229)).10.21
  Employment Agreement dated February 1, 1998
  between the Company and Douglas M. Pihl (incorporated by reference to Exhibit
  10.22 to the Companys Annual Report on Form 10-K for the year ended December
  31, 1997 (File No. 0-22229)).10.22
  Non-qualified
  Stock Option Agreement dated February 24, 1998 between the Company and
  Douglas M. Pihl (incorporated by reference to Exhibit 10.23 to the Companys
  Annual Report on Form 10-K for the year ended December 31, 1997 (File No.
  0-22229)).10.23
  Loan
  Agreement dated March 19, 1999 between the Company and Riverside Bank
  (incorporated by reference to Exhibit 10.24 to the Companys Form 10-Q for
  the quarter ended March 31, 1999 (File No. 0-22229)).10.24
  Promissory
  Note dated March 19, 1999 between the Company and Riverside Bank
  (incorporated by reference to Exhibit 10.25 to the Companys Form 10-Q for
  the quarter ended March 31, 1999 (File No. 0-22229)).10.25
  Commercial
  Security Agreement dated March 19, 1999 between the Company and Riverside
  Bank (incorporated by reference to Exhibit 10.26 to the Companys Form 10-Q
  for the quarter ended March 31, 1999 (File No. 0-22229)).10.26
  Lease
  agreement dated October 19, 1999 between St. Paul Properties, Inc. and the
  Company (incorporated by reference to Exhibit 10.27 to the Companys Form
  10-Q for the quarter ended September 30, 1999 (File No. 0-22229)).10.27
  Vital Images, Inc. and Toshiba America Medical Systems, Inc. Reseller
  Agreement * (incorporated by reference to Exhibit 10.27 to the Companys Form
  10-Q for the quarter ended September 30, 2000 (File No. 0-22229)).10.28
  Employment Agreement dated December 27, 1999 between the Company and
  Albert Emola (filed herewith electronically).10.29
  Non-qualified Stock Option Agreement dated
  December 28, 1999 between the Company and Albert Emola (filed herewith
  electronically).10.30
  Form of Change in Control Agreement between
  the Company and Albert Emola and Gregory S. Furness (filed herewith
  electronically).10.31
  Form of Change in Control Agreement between the Company and Vincent
  J. Argiro, Ph.D., Steven P. Canakes, David M. Frazee, Jay D. Miller and
  Robert C. Samec (filed herewith electronically).23.1
  Consent of PricewaterhouseCoopers LLP
  (filed herewith electronically).*  
  Portions of such exhibit are subject to a request for confidential
  treatment filed with the Commission by the Registrant.