** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

**FORM 10-K/A**

**(Amendment No. 3)**
| **ý**                                                                                                                                                        | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**     |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
| **For the fiscal year ended December 31, 2004**                                                                                                              |
| **o**                                                                                                                                                             | ** ** | **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**                                                                                                                                |

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**VITALIMAGES, INC.**

(Exact name of Registrant as specified in itscharter)
| **Minnesota**                                                                   | ** ** | **42-1321776**                       |
|---------------------------------------------------------------------------------|------------|--------------------------------------|
| (State or other  jurisdiction of  incorporation or organization)                |       | (I.R.S. Employer Identification No.) |
| **5850 Opus Parkway, Suite 300  Minnetonka, MN 55343-4414**                | ** ** | **55343-4414**                       |
| (Address of principal  executive offices)                                       |       | (Zip Code)                           |
| **(952) 487-9500**                                                              |
| (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**              |
| (Title of Class)                                                                |

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes ý  No o

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to the Form 10-K.  o

Indicateby check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Act).  Yes ý No o

Theaggregate market value of the common stock held by non-affiliates of theregistrant computed by reference to the price at which the common stock waslast sold as of June 30, 2004, the last business day of the registrant’smost recently completed second fiscal quarter, was $144,724,926.  The common stock is the registrant’s onlyclass of voting stock.

Thenumber of shares outstanding of the issuer’s classes of common stock as ofFebruary 28, 2005: Common stock, $.01 Par Value — 12,051,530.

 

 

 

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**Explanatory Note**

 

ThisAmendment No. 3 on Form 10-K/A (the “Amendment”) to the Annual Report on Form10-K for the fiscal year ended December 31, 2004, which was originally filedwith the Securities and Exchange Commission on March 16, 2005 and amended byAmendment No. 1 filed on May 2, 2005 and Amendment No. 2 filed on May 4, 2005(the “Original Filing”), is being filed to amend the Original Filing asfollows:

 

•          To clarifydisclosure about our changes in internal control over financial reportingduring the quarter ended December 31, 2004, as required by Item 9A of theAnnual Report on Form 10-K and Item 308(c) of Regulation S-K; and

 

•          A currentlydated consent letter is included from the Company’s Independent RegisteredPublic Accounting Firm dated August 5, 2005 to cover their report related tointernal control over financial reporting; and

 

•          Currently datedcertifications from our Chief Executive Officer and Chief Financial Officer asrequired by Rules 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934are included as exhibits.

 

Exceptfor the amendments described above, this Amendment does not modify or updateother disclosures in, or exhibits to, the Original Filing.

 

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Vital Images, Inc.

Form 10-K/A

 

Table of Contents

 
| Item 9A.   |   | Controls and Procedures                    |
|------------|--------|--------------------------------------------|
| Item 15.   |   | Exhibits and Financial Statement Schedules |
| Signatures |   |                                       |
|       |   |                                       |

 

 

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**Item9A. Controlsand Procedures**

 

**Disclosure controls andprocedures**

 

The Company maintains disclosure controls andprocedures that are designed to ensure that information required to bedisclosed in the reports that the Company files or submits under SecuritiesExchange Acts are recorded, processed, summarized, and reported within the timeperiods specified in the SEC’s rules and forms, and that such information isaccumulated and communicated to the Company’s management, including its ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow timelydecisions regarding required financial disclosure.

 

As of the end of the period covered by thisreport, the Company carried out an evaluation, under the supervision and withthe participation of Company management, including the Chief Executive Officerand the Chief Financial Officer, of the effectiveness of the design andoperation of our disclosure controls and procedures as defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“ExchangeAct”).  Based upon, and as of the date ofthis evaluation, the Chief Executive Officer and the Chief Financial Officerconcluded that our disclosure controls and procedures were not effective,because of the material weaknesses discussed below.  In light of the material weaknesses describedbelow, the Company performed additional analysis and other post-closingprocedures to ensure that the consolidated financial statements were preparedin accordance with generally accepted accounting principles.  Accordingly, management believes that thefinancial statements previously filed with the Original Filing fairly presentin all material respects our financial condition, results of operations andcash flows for the periods presented.

 

**Management’s report oninternal control over financial reporting**

 

Management of the Company is responsible forestablishing and maintaining adequate internal control over financialreporting. The Company’s internal control over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements. Also, projections of any evaluation of effectivenessto future periods are subject to the risk that controls may become inadequatebecause of changes in conditions or that the degree of compliance withestablished policies or procedures may deteriorate.

 

Management has completed its evaluation ofthe Company’s internal control over financial reporting as of December 31,2004.  In making its assessment ofinternal control over financial reporting, management used the criteriadescribed in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission.

 

A material weakness is a control deficiency,or combination of control deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. Management’s assessment identified the following material weaknesses inthe Company’s internal control over financial reporting as of December 31,2004:

 

(i) As of December 31, 2004, the Company didnot maintain effective control over the accuracy and completeness ofmaintenance and services revenues and deferred revenues.  Specifically, effective controls were not inplace to recognize maintenance and services revenue in the appropriateperiod.  This control deficiency resultedin the restatement of the Company’s consolidated financial statements for theyear ended December 31, 2003, for the first and second quarters of 2004 and forthe first, second and third quarters of 2003. Additionally, this control deficiency could result in a misstatement ofmaintenance and services revenue and deferred revenue that would result in amaterial misstatement to annual or interim financial statements that would notbe prevented or detected.  Accordingly,management determined that this control deficiency constitutes a materialweakness.

 

(ii) As of December 31, 2004, the Company didnot maintain effective control over property and equipment.  Specifically, effective controls were not inplace to verify the existence of certain property and equipment.  This control deficiency did not result in anadjustment to the Company’s consolidated financial statements; however, itcould result in a misstatement of property and equipment that would result in amaterial misstatement to annual or interim financial statements that would notbe prevented or detected.  Accordingly,management determined that this control deficiency constitutes a materialweakness.

 

(iii) As of December 31, 2004, the Companydid not maintain effective control over the period-end financial reporting 

 

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process. Specifically, review and approval controls over quarterly financialresults and related disclosures did not operate as designed for a sufficientperiod of time to demonstrate that they operate effectively.  This control deficiency did not result in anadjustment to the Company’s consolidated financial statements; however, itcould result in a misstatement of accounts and disclosures that would result ina material misstatement to annual or interim financial statements that wouldnot be prevented or detected. Accordingly, management determined that this control deficiency constitutesa material weakness.

 

Because of the material weaknesses discussedabove, management has concluded that the Company did not maintain effectiveinternal control over financial reporting as of December 31, 2004 based on thecriteria in *Internal Control*—*Integrated Framework*.

 

Management’s assessmentof the effectiveness of the Company’s internal control over financial reportingas of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, anindependent registered public accounting firm, as stated in their reportincluded herein.

 

**Remediationof material weaknesses**

 

During the first quarter of 2005, the Companyhas implemented, or is in the process of implementing, the followingremediation steps to address the material weaknesses described above:

 

•          The process of recognizingrevenue related to maintenance and services has been redesigned to ensure moretimely receipt of information from operational areas to ensure revenue isrecognized in the appropriate period.

•          New procedures have beenestablished to address the tagging and tracking of fixed assets to ensure thatproperty and equipment can be adequately accounted for.

•          Controls related to thequarterly financial reporting process are being closely monitored to ensurethey are operating as designed.  This material weakness was related to thethird quarter of 2004.  Although thecontrols related to the review and approval of fourth quarter results didoperate as designed, the controls have not operated for a sufficient period oftime to demonstrate that they operate effectively.

 

In addition, the Company has added a numberof additional personnel to its finance and accounting staff to ensure that allof the material weaknesses described above are appropriately remediated in atimely manner.  The additional personnelinclude a new Senior Director of Finance, a new Controller, a new Manager ofFinancial Reporting and Senior Staff Accountant, all of whom have strong publicaccounting and public company experience. The Company believes that these remediation steps will correct the materialweaknesses described above.

 

**Changes ininternal control over financial reporting**

 

The changes in our internal control overfinancial reporting during our fourth fiscal quarter ended December 31, 2004that have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting are described above under theheading “Remediation of material weaknesses.”

 

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**Report ofIndependent Registered Public Accounting Firm**

 

To the Board of Directors and Stockholders of VitalImages, Inc.:

 

We have audited management’s assessment, included inManagement’s Report on Internal Control Over Financial Reporting appearingunder Item 9A, that Vital Images, Inc. did not maintain effective internalcontrol over financial reporting as of December 31, 2004, because the Companydid not maintain effective controls over (i) the accuracy and completeness ofmaintenance and services revenues and deferred revenues, (ii) the existence ofproperty and equipment and, (iii) the review and approval of quarterlyfinancial results and related disclosures, based on criteria established in *Internal Control - Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (“COSO”). TheCompany’s management is responsible for maintaining effective internal controlover financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is to expressopinions on management’s assessment and on the effectiveness of the Company’sinternal control over financial reporting based on our audit.

 

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. An audit includes obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsider necessary in the circumstances. We believe that our audit provides areasonable basis for our opinions.

 

A company’s internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples. A company’s internal control over financial reporting includesthose policies and procedures that (i) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (ii) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat receipts and expenditures of the company are being made only in accordancewith authorizations of management and directors of the company; and (iii)provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisition, use, or disposition of the company’s assets thatcould have a material effect on the financial statements.

 

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

 

A material weakness is a control deficiency, orcombination of control deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. The following material weaknesseshave been identified and included in management’s assessment as of December 31,2004:

 

(i) As of December 31, 2004, the Company didnot maintain effective control over the accuracy and completeness of  maintenance and services revenues anddeferred revenues.  Specifically,effective controls were not in place to recognize maintenance and servicesrevenue in the appropriate period.  Thiscontrol deficiency resulted in the restatement of the Company’s consolidatedfinancial statements for the year ended December 31, 2003, for the first andsecond quarters of 2004 and for the first, second and third quarters of2003.  Additionally, this controldeficiency could result in a misstatement of maintenance and services revenueand deferred revenue that would result in a material misstatement to annual orinterim financial statements that would not be prevented or detected.  Accordingly, management determined that thiscontrol deficiency constitutes a material weakness.

 

(ii) As of December 31, 2004, the Company didnot maintain effective control over property and equipment.  Specifically, effective controls were not inplace to verify the existence of certain property and equipment.  This control deficiency did not result in anadjustment to the Company’s consolidated financial statements; however, itcould result in a misstatement of property and equipment that would result in amaterial misstatement to annual or interim financial statements that would notbe prevented or detected.  Accordingly,management determined that this control deficiency constitutes a materialweakness.

 

(iii) As of December 31, 2004, the Companydid not maintain effective control over the period-end financial reportingprocess.  Specifically, review andapproval controls over quarterly financial results and related disclosure didnot operate as designed for a sufficient period of time to demonstrate thatthey operate effectively.  This controldeficiency did not result in an adjustment to the Company’s consolidatedfinancial statements; however, it could result in a misstatement of accountsand 

 

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disclosures that would result in a materialmisstatement to annual or interim financial statements that would not beprevented or detected.  Accordingly, managementdetermined that this control deficiency constitutes a material weakness.

 

These material weaknesses were considered indetermining the nature, timing, and extent of audit tests applied in our auditof the 2004 consolidated financial statements, and this report does not affectour report dated March 2, 2005 on those consolidated financial statements.

 

In our opinion, management’s assessment that VitalImages, Inc. did not maintain effective internal control over financialreporting as of December 31, 2004, is fairly stated, in all material respects,based on criteria established in Internal Control - Integrated Framework issuedby the COSO. Also, in our opinion, because of the effect of the materialweaknesses described above on the achievement of the objectives of the controlcriteria, Vital Images, Inc. has not maintained effective internal control overfinancial reporting as of December 31, 2004, based on criteria established in *Internal Control - Integrated Framework* issued by the COSO.

 

We have also audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theconsolidated financial statements of Vital Images, Inc. at December 31, 2004and 2003 and for each of the three years in the period ended December 31, 2004and in our report dated March 2, 2005 we expressed an unqualified opinionthereon.

 

/s/ PricewaterhouseCoopers LLP

Minneapolis, Minnesota

April 29, 2005

 

 

**Item 15.  Exhibits and Financial Statement Schedules.**

 
| (a)(3) |   | Listing of Exhibits                                                                     |
|--------|--------|-----------------------------------------------------------------------------------------|
|   |   |                                                                                    |
|   |   | The Exhibits required to  be a part of this Report are listed in the Index to Exhibits. |
|   |   |                                                                                    |
| (b)    |   | Exhibits                                                                                |
|   |   |                                                                                    |
|   |   | See Item 15(a)(3) above.                                                                |

 

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**Signatures**

 

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized, in Minneapolis, Minnesota, on the ninthday of August, 2005.

 
|   |   |   |   | Vital Images, Inc.                                                                                                   |
|--------|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------|
|   |   |   |   |                                                                                                                      |
|   |   | By:    |   | /s/Michael H. Carrel                                                                                                      |
|   |   |   |   | Michael H. Carrel                                                                                                         |
|   |   |   |   | Chief  Operating Officer and Chief Financial Officer (Principal Financial Officer  and Principal Accounting Officer) |

 

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**Vital Images, Inc.Form 10-K/A**

 

**Indexto Exhibits**

 
| **Item No.** | ** ** | **Description**                                                                                                                                                                                                             | ** ** |
|--------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|         |       |                                                                                                                                                                                                                        |       |
| 23.1         |       | Consent of  PricewaterhouseCoopers LLP (filed herewith electronically.)                                                                                                                                                     |       |
|         |       |                                                                                                                                                                                                                        |       |
| 31.1         |       | Certification of Chief  Executive Officer Pursuant to Rules 13a-14(a/15d-14(a under the  Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley  Act of 2002 (filed herewith electronically.) |       |
|         |       |                                                                                                                                                                                                                        |       |
| 31.2         |       | Certification of Chief  Financial Officer Pursuant to Rules 13a-14(a/15d-14(a under the  Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act  of 2002 (filed herewith electronically.) |       |

 

 

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