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




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FORM 10-K



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|----------------------------------------------- | -----------------------------------------------------------------------------------------
|(Mark One)                                     
|x                                               | ANNUAL
 REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
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|For the fiscal year ended December 31, 2008
 OR
|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: 0-27605



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

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|--------------------------------------------------------------- | ----------------------------------
|Minnesota                                                       | 41-1859679                        
|(State
 or other jurisdiction of incorporation or organization) | (IRS
 Employer Identification No.)

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

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

Securities registered pursuant to Section 12(b) of the Act:


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|---------------------------------------------------------------- | -------------------------------------------
|Title
 of each class:                                            | Name
 of each exchange on which registered:
|Common Stock, par value $.01 per share                           | The NASDAQ Global Market                   
|Securities
registered pursuant to Section 12(g) of the Act: None



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Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes o No x

Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act. Yes o No x

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 o

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

Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer, and smaller reporting company in Rule
12b-2 of the Exchange Act. (Check one):


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|------------------------- | ------------------- | ----------------------- | ---------------------------
|Large accelerated filer o | Accelerated filer x | Non-accelerated filer o | Smaller reporting company o

Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No x

The aggregate market value of
voting and non-voting common equity held by non-affiliates computed by
reference to the price at which the common equity was last sold on June 30,
2008 was $99,394,003.

As of January 30, 2009, the
number of shares outstanding of the registrants common stock was 16,184,570.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrants
Proxy Statement for its 2009 Annual Meeting of Shareholders to be held on April
21, 2009 are incorporated by reference in Part III of this Annual Report on
Form 10-K.

1







PART I

ITEM 1. BUSINESS

Overview

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

| |   |                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Hemostat (blood clotting)
 products, principally consisting of the D-Stat Dry hemostat, a topical
 thrombin-based pad with a bandage used to control surface bleeding, and the
 D-Stat® Flowable, a thick yet flowable thrombin-based mixture for
 preventing bleeding in subcutaneous pockets,
| |   |                                                                                                                                                                                                                                                                                                 
| |  | Extraction catheters,
 principally consisting of the Pronto® V3 extraction catheter, a
 mechanical system for the removal of soft thrombus from arteries,                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                 
| |  | Vein products, principally
 consisting of the Vari-Lase® endovenous laser, a laser and
 procedure kit used for the treatment of varicose veins,                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                 
| |  | Specialty catheters,
 consisting of a variety of catheters for clinical niches including the
 Langston® dual lumen catheters, Twin-Pass® dual access
 catheters, Gandras catheters, and Gopher support catheter,
 and                                                                         
| |   |                                                                                                                                                                                                                                                                                                 
| |  | Access products,
 principally consisting of micro-introducer kits, Micro Elite and Expro Elite snares, the Guardian®
 hemostasis valve, and guidewires used in connection with percutaneous access
 to the vasculature.                                                                       

In
2000 we received FDA clearance for our first product, the Duett sealing
device, which is used to seal the puncture site following catheterization
procedures. In 2001, due to competitive developments in the sealing device
market, we made the strategic decision to develop additional products and
de-emphasize the promotion of our Duett sealing device. We have grown from net
revenue of $6.2 million in 2000 solely from the Duett device to net revenue of
$61.2 million in 2008, with 98% of our 2008 net revenue coming from products
other than the Duett device. This increase in revenue represents a compound
annual growth rate of 33% and was driven by our commitment to the research and
development of multiple new devices to diagnose and treat existing and new
vascular conditions.

As
a vertically-integrated medical device company, we generate ideas and create
new interventional medical devices and then deliver these products directly to
the physician through our direct domestic sales force and our international
distribution network. We currently have in development several additional
products that leverage our existing infrastructure to bring additional
solutions to the interventional cardiologist and interventional radiologist.

Interventional Cardiology and Interventional Radiology
Industry Background

Over
60 million Americans have one or more types of cardiovascular diseasediseases
of the heart and blood vessels. Cardiovascular disease is the number one cause
of death in the United States and is replacing infectious disease as the
worlds pre-eminent health risk. Advances in medicine have enabled physicians
to perform an increasing number of diagnostic and therapeutic treatments of cardiovascular
disease using minimally invasive methods, such as catheters placed inside the
arteries, instead of highly invasive open surgery. Cardiologists and
radiologists use diagnostic procedures, such as angiography, to confirm, and
interventional procedures, such as angioplasty and stenting, to treat diseases
of the coronary and peripheral arteries. Based on industry statistics, we
estimate that cardiologists and radiologists performed over nine million
diagnostic and interventional catheterization procedures worldwide in 2008. The
number of catheterization procedures performed is expected to continue to grow
as the incidence of cardiovascular disease continues to
increase and the diagnosis and treatment of cardiovascular disease expands
worldwide. The worldwide market for interventional medical devices in 2008
exceeded $5 billion.

2

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Each
angiographic procedure using a catheter requires a puncture in an artery,
usually the femoral artery in the groin area and sometimes the radial artery in
the wrist of the patient to gain access for the catheter. The catheter then is
deployed through an introducer sheath and into the vessel to be diagnosed or
treated. Upon completion of the procedure and removal of the catheter, the
physician must seal this puncture in the artery and the tissue tract that leads
from the skin surface to the artery to stop bleeding.

Hemostat Products

Our
hemostat products utilize thrombin, a powerful bovine-derived blood clotting
protein, to deliver a rapid seal of bleeding with a variety of shelf-stable
product configurations. Through internal development we developed a proprietary
manufacturing process to terminally sterilize our thrombin-based hemostats,
which has resulted in our ability to create unique advantages in storage,
shipping, preparation and application of our hemostat products.

Our
most popular hemostat product is the D-Stat Dry hemostat bandage. In September
2003 we received regulatory clearance and commenced sales of our D-Stat Dry
hemostat bandage in the United States and international markets. The D-Stat Dry
hemostat bandage is a version of our proprietary blood clotting substance that
is lyophilized (freeze-dried) into a gauze pad and combined with an adhesive
bandage for application. The D-Stat Dry is used as an adjunct to manual
compression for managing bleeding after catheterization procedures.

The
traditional method for sealing the puncture site after catheterization
procedures has been a manual process whereby a healthcare professional applies
direct pressure to the puncture site, sometimes using a sand bag or a large
C-clamp, for 20 minutes to an hour in order to form a blood clot. The
healthcare professional then monitors the patient, who must remain immobile in
order to prevent dislodging of the clot, for an additional two to 24 hours.
Patients subjected to manual compression generally experience significant pain
and discomfort during compression of the puncture site and during the period in
which they are required to be immobile. Many patients report that this pain is
the most uncomfortable aspect of the catheterization procedure. In addition,
patients can develop a substantial coagulated mass of blood, or hematoma,
around the puncture site. Finally, the need for healthcare personnel to provide
compression and the use of hospital beds during the recovery period results in
substantial costs to the institution, which, under virtually all current
healthcare payment systems, are not separately reimbursed.

Until
1996, manual compression was used following virtually all catheterization
procedures. In late 1995, the first vascular sealing device which did not rely
on compression was introduced in the United States. In addition to invasive
(below the skin surface) sealing devices, starting in 2000, non-invasive
patches began to be used as an assist to manual compression following
catheterizations. Non-invasive patches are used by physicians who (principally
due to cost, complexity or risk of complications) do not wish to use invasive
sealing devices, and for those patients who are contra-indicated for an
invasive sealing device. Based on the number of catheterization procedures
performed annually by cardiologists and radiologists, industry sources report
that the total market opportunity for vascular sealing devices (invasive and
non-invasive) is more than $1 billion annually.

We
completed a 376-patient, five center randomized clinical study that
demonstrated a 50% reduction in the median time-to-hemostasis when using the
D-Stat Dry bandage compared to simple manual compression. In the third quarter
of 2006 we received Food and Drug Administration (FDA) clearance of our claim
that the D-Stat Dry reduces the time-to-hemostasis in diagnostic
catheterizations. In the first quarter of 2008 we received FDA clearance and
began selling two new versions of the original D-Stat Dry bandage. The first
new version, the D-Stat® Dry Clear hemostatic bandage, is packaged
with a clear bandage which allows for better visibility of the site while the
bandage is in place. The second new version, Thrombix®, uses a lower
cost manufacturing process which offers price flexibility within the product
line. We believe that the market for hemostat pads following
catheterization procedures has grown substantially since the first competitive
patch was introduced in 2000, with a market size greater than $50 million in
2008.

3

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We
have developed additional configurations of our hemostat technology for
specialized medical procedures. Our D-Stat Radial hemostat band is a version of
the D-Stat Dry that includes a compression band to allow it to be applied over
the radial artery in the wrist. In approximately 5% of all catheterizations the
radial artery in the wrist instead of the femoral artery in the groin is used
to gain arterial access. In these cases using the radial artery, a variety of
compression splints and tapes have been used for controlling bleeding following
the procedure. The D-Stat Radial is the first device that contains an active
blood clotting agent together with a compression collar for this purpose. We
received regulatory clearance for the D-Stat Radial hemostat band in September
2003, and made manufacturing improvements to the product before launching it in
the United States in early 2004.

Our
D-Stat Flowable hemostat, which we began selling worldwide in February 2002, is
a thick yet flowable mixture of collagen, thrombin and diluent that can be
delivered topically and into voids and open spaces to control active bleeding.
The D-Stat Flowable hemostat can be used in a wide variety of procedures as an
adjunct to hemostasis. In December 2006 we received FDA approval of our
premarket approval (PMA) supplement for the use of D-Stat Flowable in the
prepectoral pockets created in pacemaker and implantable cardioverter
defibrillator (ICD) implants. Our PMA supplement was supported by the results
of our 269-patient Pocket Protector clinical study that demonstrated a 48%
reduction in the incidence of clinically relevant hematomas through the use of
D-Stat Flowable compared to the standard of care. We estimate that the U.S.
market opportunity for this prepectoral pocket indication is greater than
100,000 procedures or $10 million annually.

Our
original Duett sealing device is designed to provide a complete seal of the
puncture site following catheterization procedures such as angiography,
angioplasty and stenting. The Duett sealing device combines an easy-to-use
balloon catheter delivery mechanism with a biological procoagulant mixture,
which we believe offers advantages over both manual compression and competitive
vascular sealing devices. We began selling our Duett sealing device in Europe
in February 1998 and in the United States in June 2000. In the fourth quarter
of 2001 we introduced the Diagnostic Duett version of the Duett sealing device,
which utilizes a lower dose of procoagulant for the less-challenging diagnostic
subset of catheterization procedures.

At
the end of the first quarter of 2004 we received regulatory clearance in the
United States for the Thrombi-Pad trauma bandage. The Thrombi-Pad trauma
bandage is a larger-sized version of our D-Stat Dry designed for use in trauma
indications, does not require mixing or special storage requirements and can be
quickly applied to even severely bleeding wounds. During the second quarter of
2005 we received regulatory clearance in the United States for the Thrombi-Gel®
hemostatic foam. The Thrombi-Gel hemostatic product contains a gelatin foam pad
(instead of the non-resorbable gauze pad in the D-Stat Dry) to provide a
unique, premixed, sterile, gelatin/thrombin hemostat. An additional version of
the Thrombi-Gel in development is the Thrombi-Paste, which adds a liquid to
make a thick thrombin-based gel. Because the Thrombi-Pad, Thrombi-Gel and
Thrombi-Paste products are expected to be utilized outside of our core market
of interventional procedures, we have licensed the distribution of these
products to King Pharmaceuticals, Inc., as described under Agreements with
King Pharmaceuticals, Inc. below.

Extraction Catheters

Our
Pronto products consist of a catheter with a proprietary distal tip and large
extraction lumen that can be delivered into arteries to mechanically remove
blood clots using simple vacuum suction. The Pronto extraction catheter was
initially developed by Dr. Pedro Silva of Milan, Italy, who exclusively
licensed the design to us in 2002. We received CE mark approval and commenced
international sales of the Pronto in August 2003, and received FDA clearance in
December 2003 and commenced sales in the United States in early 2004. In the
fourth quarter of 2005 we launched the third generation design of the Pronto,
named the Pronto V3. The V3 version of the Pronto resulted in a substantial
increase in Pronto sales in 2006. The FDA cleared the Pronto V3
catheter for specific use within the coronary system in December 2006. We
believe that the market size for the removal of soft thrombus is greater than
$100 million per year worldwide.

4

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We
have developed four additional versions of extraction catheters -- the
Pronto-Short, Pronto .035, Pronto LP and QXT. The Pronto-Short is a shorter
and larger version designed for use in clotted dialysis grafts that was
launched in August 2005. The Pronto 035 is a much larger version designed for
use in large vessel peripheral indications that was launched in August 2007.
The Pronto LP is a low profile version that is designed for use in smaller
vessels and was launched in January 2008. The QXT is a low-cost version that is
designed to be sold in certain international markets and was launched in March
2008.

Vein Products

Our
Vari-Lase endovenous laser products consist of a laser console, procedure kits
and accessories used in the treatment of reflux of the great saphenous vein,
commonly referred to as varicose veins. More than one million people in the
United States seek treatment each year for varicose veins. Left untreated,
varicose veins can result in serious clinical consequences, including limited
mobility and venous stasis ulcers. Historically, an invasive surgical procedure
known as vein stripping was the only treatment for severe varicose veins. While
vein stripping is still performed, since 2002 a non-surgical procedure using
endovenous laser energy to treat and close the diseased vein has become a
preferred alternative. Recent clinical data on endovenous laser therapy has
demonstrated excellent clinical results and outstanding patient satisfaction.
During the fourth quarter of 2004 the Center for Medicare and Medicaid Services
(CMS) published the Medicare Physicians Fee Schedule which established
favorable reimbursement rates for the endovenous laser procedure starting
January 1, 2005. Private insurance companies also have issued reimbursement
coverage decisions resulting in more physicians adding endovenous laser therapy
to their practice. We believe the current U.S. market size for treating
varicose veins using endovenous therapy is greater than $140 million per year.

The
first product we launched in our vein product line was our Vari-Lase®
procedure kit in July 2003 in the United States. Our Vari-Lase procedure kit is
custom-designed for the endovenous procedure, with features supporting
ease-of-use and safety, and is compatible with many of the competitive laser
consoles used in this procedure. In December 2003, we received FDA clearance
for our Vari-Lase laser console, which is manufactured to our specifications by
MedArt, a leading Denmark-based medical laser manufacturer. Since 2004 we have
continued our expansion by adding several accessory items to our vein product
line. In April 2007 we launched the Vari-Lase Bright Tip fiber which utilizes
a ceramic sleeve to the distal tip of the laser fiber to provide improved
ultrasound visibility and prevent contact between the energy-transmitting fiber
tip and the vein wall during the application of laser energy.

Specialty Catheters

Specialty
catheters consist of a variety of catheters designed to perform unique
functions within clinical niches in interventional medicine. At the end of the
third quarter of 2004 we received regulatory clearance in the United States for
the Langston dual lumen pigtail catheter. The Langston catheter is used for the
precise measurement of intravascular pressure gradients, primarily measured to
diagnose aortic valve stenosis. We believe our Langston catheter is the only
dual lumen pigtail catheter on the U.S. market that can be used for this
intended indication. We believe the U.S. market opportunity for the Langston
catheter product line is $10 million annually.

During
2006 we launched both the Twin-Pass dual access catheter and Skyway®
support catheter. The Twin-Pass is a two lumen catheter designed to be used in
conjunction with steerable guidewires to access discrete regions of the
coronary and peripheral arterial vasculature and for use during procedures
utilizing two guidewires. The Skyway support catheter can be used in the
support of guidewires during difficult lesion crossing procedures and in the
exchange of guide wires in an interventional procedure. We believe that both of
these products address market opportunities of between $1 million and $5
million annually within interventional cardiology.

5

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In
July of 2007 we launched the Gopher support catheter. The Gopher catheter is
designed to assist in the passage of interventional devices through arterial
lesions by utilizing a unique rotational force. We believe the market
opportunity of the Gopher is in excess of $2 million per year.

In
March of 2008 we launched the Gandras catheter. The Gandras catheter is
designed to be used in the catheterization of uterine and pelvic arteries. It
has a unique design that provides the benefits of a microcatheter without the
added cost.

Access Products

Access
products are used to gain percutaneous access to the vasculature for a wide
variety of arterial and venous procedures. We started selling access products
in July 2003. Our access products include a full line of micro-introducer kits
and a variety of specialty guidewires.

During
2007 we entered into an agreement with Zerusa Limited, whereby we agreed to act
as the exclusive U.S. distributor of Zerusas Guardian hemostatic
valve. The Guardian hemostatic valve is a valve used in catheterization
procedures to allow the placement of multiple devices simultaneously in the
artery with a unique push-button operation that is designed to minimize blood
loss.

During
2008 we entered into an agreement with Radius Medical to distribute their Micro
Elite and Expro Snares within the United States. The Elite snares feature a
highly torqueable shaft design for control and maneuverability when accessing
distal targets. We believe the market opportunity for the Micro Elite Snare is
in excess of $2 million per year and the market opportunity for the Expro
Snares is in excess of $5 million per year.

In
May of 2008 we launched the InnerChange micro-introducer catheter. The
InnerChange micro-introducer catheter is a micro-introducer kit that can also
be utilized as a sheathless catheter.

Other Products

We
have developed and offer several additional clinical niche products, and
additional products in international markets which are not yet approved in the
United States. During the second quarter of 2002 we acquired the Acolysis®ultrasound thrombolysis system. The Acolysis system uses ultrasound
energy generated by the Acolysis controller that is delivered by the disposable
Acolysis probe to lyse blood clots and plaque within the artery. The Acolysis
controller and probes are sold only in international markets, where it has been
sold principally for the treatment of peripheral vascular disease.

The
amount of total revenue contributed by each of our product lines and by
geographic areas for the last three fiscal years is set forth in Notes 2 and 11
to our Consolidated Financial Statements in Item 8 of Part II of this Form
10-K.

Agreements with King Pharmaceuticals, Inc.

In
January 2007, we entered into three agreements with King Pharmaceuticals, Inc.,
consisting of a License Agreement, a Device Supply Agreement and a Thrombin-JMI®
Supply Agreement.

The
effect of these three agreements was to forge a new relationship between us and
King having essentially three components. First, King is selling through its
direct sales force, and we are manufacturing and supplying to King, our
Thrombi-Pad trauma bandage and Thrombi-Gel hemostat products (and in the future
our Thrombi-Paste hemostat product which is in development). Second, we are
working with King to develop additional hemostat products to be sold by King
outside of our direct sales forces call point of cardiac, peripheral and
electrophysiology catheterization laboratories. Third, King is selling
Thrombin-JMI® to us for use in the manufacture of our hemostatic
products under a 10-year, fixed price arrangement.

6

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Under
the terms of the License Agreement, we granted to King an exclusive,
royalty-free, fully-paid up, perpetual, worldwide right and license to all of
our patents and know-how relating to the development, manufacture, use, sale,
importation or other exploitation of our Thrombi-Pad trauma bandage,
Thrombi-Gel 10, 40 and 100 hemostats, Thrombi-Paste hemostat (collectively, the
Products) and all future medical devices having application in the Field (as
defined below) and intended to produce hemostasis by accelerating the clotting
process of blood (a hemostat device). The Field is defined as all
applications of hemostat devices in all areas other than catheterization
laboratories (cardiac and peripheral), electrophysiology laboratories and
holding and recovery rooms for such laboratories. Upon execution of the License
Agreement, King paid us a one-time payment of $6.0 million. No other payments
are due from King to us under the License Agreement. The term of the License
Agreement commenced on January 9, 2007 and continues until the later of the
expiration of each licensed patent or Kings relinquishment of its license
rights under the licensed know-how.

Under
the terms of the Device Supply Agreement, we agreed to manufacture and supply
the Products to King and King agreed to purchase the Products from us for
Kings exclusive commercialization, distribution, sale and use of the Products
in the Field. King does not have any minimum purchase obligations under the
Device Supply Agreement. The Device Supply Agreement does not limit our ability
to manufacture the Products for our own commercialization, distribution, sale
and use outside of the Field. The transfer prices are fixed for each Product
under the Device Supply Agreement and are adjusted for cost and inflation increases
according to a market index. Upon the first commercial sale by King of a
Thrombi-Gel hemostat (which occurred in May 2007), King was required to make
(and did make) a one-time, non-refundable milestone payment to us of $1.0
million. Upon the first commercial sale by King of a Thrombi-Paste hemostat
product, which we anticipate will be in 2010, King will be required to make
another one-time, non-refundable milestone payment to us of $1.0 million. We
have agreed to continue to perform the regulatory work necessary to obtain
surgical approvals for the Thrombi-Gel and Thrombi-Paste products, and King has
agreed to reimburse us for our expenses in obtaining these approvals. If, after
undertaking and completing the development and regulatory plans with respect to
the Thrombi-Gel and Thrombi-Paste products, such development and regulatory
efforts have not resulted in regulatory approval for surgical use, we have
agreed to make a one-time, non-creditable, non-refundable payment of $2.5
million to King if the FDA has not approved the Thrombi-Gel product for
surgical use, and an additional $2.5 million if the FDA has not approved the
Thrombi-Paste product for surgical use. We believe the probability of making
these one-time payments to King is remote. Under the Device Supply Agreement,
King also has certain rights of first refusal with respect to any hemostatic
devices for use in the Field that we may develop on our own or at the request
of King. The Device Supply Agreement has an initial term of 10 years, followed
by successive automatic one-year extensions, subject to termination by the
parties under certain circumstances, including termination by King without
cause anytime after the third anniversary of its execution upon two years prior
written notice to us.

Under
the terms of the Thrombin-JMI® Supply Agreement, King agreed to
manufacture and supply thrombin to us on a non-exclusive basis. King agreed to
supply us with such quantity of thrombin as we may order for use in devices not
intended for sale by King in the Field at a fixed price throughout the term of
the Thrombin-JMI® Supply Agreement as adjusted for inflation,
variations in potency and other factors. King also agreed to provide thrombin
to us under the Thrombin-JMI® Supply Agreement at no cost for
incorporation into Products and hemostat devices intended for sale in the Field
by King. The Thrombin-JMI® Supply Agreement has an initial term of
10 years, followed by successive automatic one-year extensions, subject to
termination by the parties under certain circumstances, including (1)
termination by King without cause anytime after the fifth anniversary of its
execution upon five years prior written notice to us and (2) termination by us
without cause anytime after the fifth anniversary of its execution upon five
years prior written notice to King provided that the Device Supply Agreement
has expired on its terms or the parties have agreed to terminate it.

7

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Business Strategy

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

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Maintain
 and Improve our Clinically-Oriented Direct Sales Force in the United States.During the third quarter of 2000 we
 commenced sales of our products in the United States through a direct sales
 force of clinically trained account managers who sell and train
 interventional cardiologists, radiologists and catheterization laboratory
 personnel on the use of our products. As our product lines have increased, we
 have increased the size of our sales force to 89 at the end of 2008, which
 provides substantially complete geographic coverage of the United States.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Expand
 our Existing Products to Our Existing Market.Starting in 2003 we have launched multiple
 new products in the United States through our direct sales force to our
 existing markets. Pursuing this multiple product strategy has generated
 material sales growth, and we believe that each of our current product lines
 has the potential to generate continued sales growth during 2009 and beyond.                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Develop
 New Devices to be Sold Through our Direct Sales Force to our Existing
 Customers.We
 intend to continue to leverage our direct sales force by bringing additional
 products to the interventional physician. During 2009 we have plans to launch
 10 new products in the United States, with additional products in development
 for launch in following years.                                                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Explore
 Corporate Partnerships for the Distribution of Products Through our Direct
 Sales Force to our Existing Customers.We intend to continue to leverage our
 direct sales force by bringing additional products to the interventional
 physician through distribution agreements. Over the past two years we have
 partnered with Radius Medical and Zerusa Limited to distribute their products
 in the United States. We are in discussions with additional potential
 distribution partners and expect to distribute additional products as they
 become available.             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Explore
 Corporate Relationships to Augment our Direct Sales Force. In markets for our products beyond the
 interventional physician (such as occurred with our Thrombi-Gel,
 Thrombi-Paste and Thrombi-Pad products) and in other situations where
 synergistic sales can result, we intend to enter into corporate relationships
 to broaden our products reach and increase our revenues without distracting
 our direct sales force.                                                                                                                                               

Sales, Marketing and Distribution

In
the third quarter of 2000 we commenced sales of our Duett sealing device in the
United States through our direct sales organization. As of December 31, 2008,
our direct sales force consisted of approximately 89 employees who sell our
entire line of interventional products. We believe that the majority of
interventional catheterization procedures in the United States are performed in
high volume catheterization laboratories, and that these institutions can be
served by our focused direct sales force.

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

We
are focused on building market awareness and acceptance of our products. Our
marketing department provides a wide range of programs, materials and events
that support our sales force. These include product training,
conference and trade show appearances and sales literature and promotional
materials.

8

---



Our
international sales and marketing strategy has been to sell to interventional
cardiologists and interventional radiologists through established independent
distributors in major international markets, subject to required regulatory approvals. In Germany, we created a wholly-owned
subsidiary to sell
directly to customers in the German market beginning in the fourth quarter of
2000. In the first quarter of 2008 we transitioned our sales in Germany to an
independent distributor and received an up-front fee and closed our German
subsidiary. We have entered into multi-year written distribution agreements
with each of our independent distributors, and we ship our products to these
distributors upon receipt of purchase orders. Each of our independent
distributors has the exclusive right to sell our products within a defined
territory. These distributors also market other medical products, although they
have agreed not to sell directly competitive products. Our independent
distributors purchase our products from us at a discount from list price and
resell the device to hospitals and clinics. Sales to international distributors
are denominated in United States dollars, with the exception of the Germany
distributor where sales are denominated in Euros. The end-user price is
determined by the distributor and varies from country to country.

New Product Development

Our
research and development staff is currently focused on developing new products
to sell to our existing customer base through our direct sales force and on
developing next generation versions of our existing products. We incurred
expenses of $6,333,000 in 2008, $5,481,000 in 2007, and $4,578,000 in 2006 for
research and development activities. To further leverage our efficiencies, our
research and development group continues to develop in-house capabilities to
manufacture some of the components currently produced by outside vendors.

In
addition to our normal research and development expenses, we incurred $-0- in
2008, $147,000 in 2007, and $2,802,000 in 2006 in thrombin qualification
expenses relating to our project to qualify a second source of thrombin. We do
not expect to incur additional expenses on the thrombin qualification project
in 2009.

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

Manufacturing

We
manufacture our products in our facilities located in the suburbs of
Minneapolis, Minnesota. The catheter manufacturing and packaging processes
occur under a controlled clean room environment. Our quality system,
manufacturing facilities and processes have been certified to be compliant with
the applicable European standards EN46001 and the succeeding EN13485 since July
1998. Our quality system was most recently audited by the FDA in October 2005
with no deficiencies noted.

We
purchase components from various suppliers and rely on single sources for
several parts of our products. We purchase our United States product
requirements for thrombin (a component in the Duett and in all of the D-Stat
products) under the Thrombin-JMI® Supply Agreement with King
Pharmaceuticals, Inc. We purchase our International product requirements for
thrombin under a supply agreement with Sigma-Aldrich Fine Chemicals, an
operating division of Sigma-Aldrich, Inc. To date, we have not experienced any
significant adverse effects resulting from shortages of components.

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

9

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Competition

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

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

| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| |  | SyvekPatch®, manufactured
 and marketed by Marine Polymer Technologies, Inc.                      
| |   |                                                                                                   
| |  | HemCon®,
 distributed by Cardinal Health, Inc., manufactured by Hemcon Medical
 Technologies, Inc.
| |   |                                                                                                   
| |  | Closur-P.A.D.TM, manufactured and marketed by Scion Cardiovascular, Inc.                          

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

We
are aware of many companies that sell a product for the endovenous laser
treatment of varicose veins, including AngioDynamics Inc., biolitec, Dornier
MedTech, and CoolTouch. Each of the competitive products contains similar types
of components for performing endovenous laser therapy but differ in procedural
training, laser wavelength, custom-designed features and customer support. In
addition, VNUS® Medical Technologies (VNUS) sells an alternative
endovenous procedure that utilizes radiofrequency as opposed to laser energy
for the treatment of varicose veins.

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

| |   |                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Angio-Seal®
 device, sold by St. Jude Medical, Inc. and developed by Kensey Nash
 Corporation, which seals the puncture site through the use of a collagen plug
 on the outside of the artery connected by a suture to a biodegradable anchor
 which is inserted into the artery.
| |   |                                                                                                                                                                                                                                                                                      
| |  | The StarClose and Closer
 devices, sold by Perclose, Inc., a subsidiary of Abbott Laboratories which
 seal the puncture site through the use of a staple and suture, respectively,
 which enables a physician to perform a minimally invasive replication of open
 surgery.        

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

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

10

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Regulatory Requirements

United States

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

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

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

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

Our
Duett sealing device is classified as a Class III device and is subject to the
PMA requirements. In May 1997, the FDA determined that the review of the Duett
sealing device would be delegated to the Center for Devices and Radiological
Health area of the FDA, with a consulting review by the Center for Biologic
Evaluation and Research. During 1998 and 1999, we received approval of our IDE
application, completed our multi-center clinical study and submitted our PMA
application with the FDA. On June 22, 2000, we received approval from the FDA
of our PMA application to sell the Duett sealing device in the United States.
Our D-Stat Flowable is dually classified as both a Class III and Class II
device based on the three distinct indications for use that have been assigned
to this product.

Our
D-Stat Dry, Pronto, Vari-Lase, specialty catheters and access products product
lines generally are classified as Class II products and therefore require
clearance of a 510(k) notification by the FDA prior to being sold in the United
States. Each of the devices within these product lines was subject to a 510(k)
notification which was determined to be substantially equivalent to a legally
marketed predicate device by the FDA, thereby allowing commercial marketing in
the United States.

Our
Thrombi-Gel and Thrombi-Paste product lines are indicated for use as topical
hemostats and, as such, are classified as Class II products. Approval for
expanded use as surgical hemostats will place these products into the Class III
designation subject to the PMA requirements. On October 31, 2006, the FDA published a proposed rule to
reclassify absorbable hemostatic devices from Class III to Class II. If
implemented as written, approval of these products as absorbable hemostats
would no longer require PMA approval and could be accomplished through the
510(k) notification process. There is no assurance that the proposed rule will
be adopted as written and there is no firm date for a final decision on this
action.

11

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

International

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

Our
hemostatic products contain bovine-derived thrombin and are subject to
additional regulatory review within the European Union to minimize the risk of
exposure to viral and BSE pathogens. The regulations in this area continue to
evolve and our products may be subject to additional regulatory scrutiny in the
future.

International
sales of our products are subject to the regulatory requirements of each
country in which we sell. These requirements vary from country to country but
generally are less stringent than those in the United States. We have obtained
regulatory approvals where required for us to sell our products in those
countries.

Third Party Reimbursement

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

CMS
and the AMA Current Procedure Terminology (CPT) panel finalized the
implementation of reimbursement codes for the endovenous laser ablation
procedure beginning in January 2005. This action cleared the way for a
consistent means of billing the Medicare program for medically necessary vein
treatments using laser technologies and resulted in a favorable reimbursement
rate. Reimbursement for these procedures is now well-established but adjusted
annually in accordance with the normal adjustment procedures of CMS.

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

12

---



Patents and Intellectual Property

We
file patent applications to protect technology, inventions and improvements
that are significant to the development of our business, and use trade secrets
and trademarks to protect other areas of our business. We currently have 10
U.S. patents issued and nine additional patents pending concerning our Duett
sealing device, Pronto catheter, Langston dual lumen pigtail catheter and other
specialty catheters, Vari-Lase product line and D-Stat Dry product. We also
have pursued international patent applications.

In
the past, the interventional medical device market in general and the
endovenous laser therapy field in particular, are characterized by frequent and
substantial intellectual property litigation. (See Legal Proceedings in Item
3 of Part I of this Form 10-K.) The interpretation of patents involves complex
and evolving legal and factual questions. Intellectual property litigation in
recent years has proven to be complex and expensive, and the outcome of such
litigation is difficult to predict.

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

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

We
also register the trademarks and trade names through which we conduct our
business. To date, we have registered the trademarks Acolysis®,
Acolysis Probe®, Acolysis System®, Acolysis System
Therapeutic Ultrasound Thrombolysis®, Auto-Fill®,
D-Stat®, Langston®, Pronto®,
Skyway®,
Thrombix®, Thrombi-Gel®, Twin-Pass®,
VacLock®, and Vari-Lase®, and we use the following
trademarks Axis, Bright Tip, Carlucci, D-Stat Dry,
Gandras,
Gopher GuideLiner, Handy, InnerChange,
Jiffy, Max-Support,
Minnie, QXT, ThrombiGel Paste Thrombin-VSI, Vascular
Solutions Duett,
and the Duett stylized logo. We acquired the registered trademark Acolysis in
connection with our acquisition of the Acolysis therapeutic ultrasound business
in 2002. U.S. trademark registrations are generally for a term of 10 years,
renewable every 10 years as long as the trademark is used in the regular course
of trade.

Employees

As
of December 31, 2008, we had 252 full-time employees. Of these employees, 70
were in manufacturing activities, 115 were in sales and marketing activities,
24 were in research and development activities, 27 were in regulatory, quality
assurance and clinical research activities and 16 were in general and
administrative functions. We have never had a work stoppage and none of our
employees are covered by collective bargaining agreements. We believe our
employee relations are good. We are an Equal Opportunity Employer.

13

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Executive Officers of the Registrant

Our
executive officers as of January 31, 2009 are as follows:

|                  |  |     |  |                                                                            
|----------------- |  | --- |  | ---------------------------------------------------------------------------
|Name              |  | Age |  | Position                                                                   
|Howard Root       |  | 48  |  | Chief Executive Officer
 and Director                                      
|James Hennen      |  | 36  |  | Chief Financial Officer,
 Vice President of Finance and Corporate Secretary
|James Quackenbush |  | 50  |  | Vice President of
 Manufacturing                                           
|Fred Reuning      |  | 53  |  | Vice President of
 Vari-Lase Business                                      
|Brett Demchuk     |  | 45  |  | Vice President of Quality                                                  
|William Rutstein  |  | 56  |  | Vice President of
 International Sales                                     
|Susan Christian   |  | 40  |  | Vice President of Sales
 Operations                                        

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

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

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

Fred Reuninghas served as our Vice
President of Vari-Lase
Business since October 2008. Mr. Reuning served as our Vice President of
Marketing from July 2005 through September 2008. Prior to joining us, Mr.
Reuning worked at Smiths Medical, a medical device company, where he was
Director of Marketing for the Vascular Access division from November 2001 to
July 2005 and Senior Product Manager from January 2000 to November 2001. From
1987 to 2000, Mr. Reuning worked for Novartis Nutrition, a medical nutrition
company, in product management for medical devices with his last position as
Group Manager, Medical Devices from November 1997 to December 1999. Mr. Reuning
received a B.A. in history from Washington and Lee University and an M.A. in
international studies from Johns Hopkins School of Advanced International
Studies.

Brett Demchukhas served as our Vice
President of Quality
since July 2007. Prior to joining us, Mr. Demchuk worked at ATS Medical, Inc.
where he was Senior Director of Operations from 1998 to July 2007 and Quality
Manager from 1992 to 1998. Prior to this time, he held quality assurance
engineering positions at Orthomet and GV Medical. Mr. Demchuk received a B.S.
in Mechanical Engineering from North Dakota State University.

14

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Bill Rutstein has served as our Vice
President of
International Sales since October 2008. Mr. Rutstein served as our Senior
Director of International Sales from January 2008 to September 2008 and was our
Director of International Sales since joining Vascular Solutions in August
1999. Prior to joining us, Mr. Rutstein was the Business Unit Director for the
cardiosurgery division of Minntech Corporation, a medical device company, from
April 1997 to July 1999. From November 1988 to March 1997, Mr. Rutstein worked
for Daig Corporation (a St. Jude Medical Company), a medical device company
specializing in cardiology and electrophysiology catheters, where he served as
Regional Sales Manager, National Sales Manager, OEM Sales Manager and
International Sales Manager.

Susan Christianhas served as our Vice
President of Sales
Operations since October 2008. Ms. Christian previously served as our Senior
Director of Sales Operations and Director of Sales Administration since she
joined the company in September 2006. Prior to joining us, Ms. Christian served
as the Senior Vice President of Finance & Operations of Tad Ware &
Company, Inc., a marketing communications agency, where she worked from April
1992 to September 2006. From August 1990 through March 1992, Ms. Christian was
a Tax Accountant for Arthur Anderson & Co.. Ms. Christian received a B.B.A.
in Business/Accounting from the University of Wisconsin  Eau Claire. Ms.
Christian is a Certified Public Accountant (inactive).

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

Available Information

We
make available free of charge on or through our internet website at www.vascularsolutions.com our annual report on Form 10-K,
quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to these
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (the Exchange Act) as soon as reasonably practicable after
we electronically file such material with, or furnish it to, the SEC.

ITEM 1A. RISK FACTORS

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

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

During
the third quarter of 2000 we commenced sales of our first product in the United
States, the Duett sealing device. In the second half of 2003, we received
clearance to commence sales of four new interventional products in the United
States, and we have launched additional new products since 2003. Our success
will depend on the continued launch of new products and the medical communitys
acceptance of our new products. We cannot predict how quickly, if at all, the
medical community will accept our new products, or, if accepted, the
continuation or extent of their use. Our potential customers must:

| |   |                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------
| |  | believe that our products offer benefits
 compared to the methodologies and/or devices that they are currently using;
| |   |                                                                                                                      
| |  | use our products and
 obtain acceptable clinical outcomes;                                                           
| |   |                                                                                                                      
| |  | believe that our products
 are worth the price that they will be asked to pay; and                                   
| |   |                                                                                                                      
| |  | be willing to commit the
 time and resources required to change their current methodology.                           

15

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Because
we are often selling a new technology, we have limited ability to predict the
level of growth or timing in sales of these products. If we encounter
difficulties in growing our sales of our new medical devices in the United
States, our business will be seriously harmed.

We have limited working capital to pursue our business.

On
December 31, 2008, we had $7.2 million in cash and cash equivalents and a
working capital of $22.7 million. In 2008, our operating activities resulted in
the usage of $2.3 million of cash, principally through the payments to settle
litigation with both VNUS and Diomed Holdings Inc. We believe that our current
working capital is sufficient for all of our foreseeable needs; however, if we
encounter unexpected expenses or substantial disruption to our business, we
could be forced to raise additional working capital. We have no commitments for
additional funding and so our ability to meet any unexpected liquidity needs is
uncertain. If we raise additional funds through the issuance of equity
securities, our shareholders may experience significant dilution. Furthermore,
additional financing may not be available when needed or, if available,
financing may not be on terms favorable to us or our shareholders. If financing
is not available when required or is not available on acceptable terms, we may
be unable to develop or market our products or unable to take advantage of
business opportunities, or we may be required to significantly curtail our
business operations.

We
do not know what impact the current unprecedented volatility in worldwide
credit and equity markets may have on our ability to obtain future financing.
Since September 2008, we have seen unprecedented turmoil in equity and credit
markets that has resulted in record-setting losses in the stock markets,
dramatic decreases of liquidity in the credit markets, bank failures, hedge
fund closures and massive market intervention by the United States and foreign
governments. Because of the unprecedented nature of these market events, and
because the markets remain highly-volatile today, we cannot predict what effect
these events will have on our ability to obtain financing in the future.

We have a limited history of profitability and may not be
profitable in the future.

Since
we commenced operations in February 1997 through 2007 we have incurred net
losses primarily from costs relating to the development and commercialization
of our new products. At December 31, 2008, we had an accumulated deficit of
$53.7 million. We believe that in 2008 we achieved a level of consistent
profitability from our continuing operations; however, while we believe profits
from operations will continue, there is no assurance that this will continue,
and we cannot be certain that we can sustain or increase profitability on a
quarterly or annual basis.

We may face litigation claims which could prevent us from
manufacturing and selling our products or result in our incurring substantial
costs and liabilities.

The
interventional medical device industry is characterized by numerous patent
filings and frequent and substantial intellectual property litigation.
Companies in the interventional medical device industry have employed
intellectual property litigation in an attempt to gain a competitive advantage.
While we do not believe that any of our products infringe any existing patent,
it is highly likely that we will become subject to intellectual property claims
with respect to our new or current products in the future. Intellectual
property litigation in recent years has proven to be very complex, and the
outcome of such litigation is difficult to predict.

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

16

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

Our future operating results are difficult to predict and
may vary significantly from quarter to quarter, which may adversely affect the
price of our common stock.

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

| |   |                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------
| |  | the level of sales of our
 products in the United States market;                                                                             
| |   |                                                                                                                                              
| |  | our ability to introduce
 new products and enhancements in a timely manner;                                                                  
| |   |                                                                                                                                              
| |  | the demand for and acceptance of our products;                                                                                               
| |   |                                                                                                                                              
| |  | the success of our competition and the
 introduction of alternative products;                                                                
| |   |                                                                                                                                              
| |  | our ability to command favorable pricing
 for our products;                                                                                  
| |   |                                                                                                                                              
| |  | the growth
 of the market for our devices;                                                                                                   
| |   |                                                                                                                                              
| |  | the expansion and rate of
 success of our direct sales force in the United States and our independent
 distributors internationally;         
| |   |                                                                                                                                              
| |  | actions relating to
 ongoing FDA compliance;                                                                                                 
| |   |                                                                                                                                              
| |  | the effect of intellectual
 property disputes;                                                                                               
| |   |                                                                                                                                              
| |  | the size and timing of
 orders from independent distributors or customers;                                                                   
| |   |                                                                                                                                              
| |  | the attraction and
 retention of key personnel, particularly in sales and marketing, regulatory,
 manufacturing and research and development;
| |   |                                                                                                                                              
| |  | unanticipated delays or an
 inability to control costs;                                                                                      
| |   |                                                                                                                                              
| |  | general economic
 conditions as well as those specific to our customers and markets; and                                                     
| |   |                                                                                                                                              
| |  | seasonal fluctuations in
 revenue due to the elective nature of some procedures.                                                             

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

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

17

---



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

The
existing market for interventional medical devices is intensely competitive. We
expect competition to increase further as companies develop new products and/or
modify their existing products to compete directly with ours. Each of our
products encounters competition from several medical device companies,
including Medtronic Inc., Abbott Laboratories and St. Jude Medical Inc. Each of
these companies has:

| |   |                                                              
| | - | -------------------------------------------------------------
| |  | better name recognition;                                     
| |   |                                                              
| |  | broader product lines;                                       
| |   |                                                              
| |  | greater sales, marketing
 and distribution capabilities;     
| |   |                                                              
| |  | significantly greater
 financial resources;                  
| |   |                                                              
| |  | larger research and
 development staffs and facilities; and  
| |   |                                                              
| |  | existing relationships
 with some of our potential customers.

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

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

Our
international sales are subject to several risks, including:

| |   |                                                                                     
| | - | ------------------------------------------------------------------------------------
| |  | the ability of our
 independent distributors to sell our products;                  
| |   |                                                                                     
| |  | the impact of recessions
 in economies outside the United States;                   
| |   |                                                                                     
| |  | greater difficulty in
 collecting accounts receivable and longer collection periods;
| |   |                                                                                     
| |  | unexpected changes in
 regulatory requirements, tariffs or other trade barriers;    
| |   |                                                                                     
| |  | weaker intellectual
 property rights protection in some countries;                  
| |   |                                                                                     
| |  | potentially adverse tax
 consequences; and                                          
| |   |                                                                                     
| |  | political and economic
 instability.                                                

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

18

---



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

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

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

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

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

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

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

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

| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| |  | obtain the clearance of
 the FDA and international agencies before we can market and sell our
 products;    
| |   |                                                                                                             
| |  | satisfy these agencies
 content requirements for all of our labeling, sales and promotional
 materials; and
| |   |                                                                                                             
| |  | undergo rigorous
 inspections by these agencies.                                                            

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

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

19

---



ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our
offices are located in two buildings totaling approximately 93,000 square feet
of leased space in two suburbs of Minneapolis, Minnesota (Maple Grove and
Plymouth). These facilities include approximately 37,000 square feet used for
manufacturing activities and approximately 7,000 square feet used for research
and laboratory activities, with the remainder used for general office space. On
November 12, 2007, we amended both lease agreements to extend the terms of the
leases through September 30, 2015, with additional renewal options.

ITEM 3. LEGAL PROCEEDINGS

On
May 11, 2005 we initiated a lawsuit for product disparagement and false
advertising against Marine Polymer Technologies, Inc., a Delaware corporation
(Marine Polymer). In the lawsuit, we alleged that Marine Polymer made
defamatory and disparaging statements concerning our D-Stat Dry hemostatic
bandage. We sought relief in the form of an injunction to enjoin Marine Polymer
from continuing to defame and disparage our products, damages as a result of
such statements, and other costs, disbursements and attorneys fees. Marine
Polymer brought a counter-claim against us including, among other claims,
business defamation and product disparagement for statements allegedly made by
us concerning Marine Polymers SyvekPatch®. Marine Polymer sought
relief in the form of monetary damages, costs, disbursements and attorneys
fees. The trial commenced on March 24, 2008 in the U.S. District Court for the
District of Massachusetts. At the conclusion of the trial on April 7, 2008 the
jury returned a verdict in our favor and against Marine Polymer for product
disparagement concerning statements made regarding the safety of our D-Stat Dry
hemostat product. In its verdict, the jury found that Marine Polymers
statements were false and disparaged the D-Stat Dry product and awarded us
$4,500,000 in monetary damages. The jury rejected Marine Polymers
counterclaims in their entirety. Following post trial motions, on June 30,
2008, the Court upheld the jury verdict, granted our request for a permanent
injunction against Marine Polymer for the statements that the jury found were
false, and added prejudgment interest on the jury verdict award in the amount
of $592,124. On July 14, 2008, Marine Polymer filed a Notice of Appeal with the
U.S. First Circuit Court of Appeals seeking to overturn the monetary damages
and injunction issued against them. Oral argument on Marine Polymers appeal is
scheduled to be held on February 4, 2009. Marine Polymer is not appealing the
Courts rejection of its counter claims.

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

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

None.

20

---



PART
II

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

Our
common stock is traded on the NASDAQ Global Market under the symbol VASC. The
following table sets forth, for the periods indicated, the high and low sales
prices for our common stock as reported by the NASDAQ Global Market.

|               |  |      |       |     |   |      | 
|-------------- |  | ---- | ----- | --- | - | ---- | 
|               |  | High |       | Low |  
|               |  |      |       |     |   |      | 
|2008           |  |      |       |     |   |      | 
|First Quarter  |  | $    | 6.80  |     | $ | 5.63 | 
|Second Quarter |  |      | 7.66  |     |   | 6.19 | 
|Third Quarter  |  |      | 9.06  |     |   | 6.04 | 
|Fourth Quarter |  |      | 9.75  |     |   | 6.78 | 
|               |  |      |       |     |   |      | 
|2007           |  |      |       |     |   |      | 
|First Quarter  |  | $    | 11.03 |     | $ | 8.85 | 
|Second Quarter |  |      | 10.01 |     |   | 8.23 | 
|Third Quarter  |  |      | 9.83  |     |   | 7.08 | 
|Fourth Quarter |  |      | 8.75  |     |   | 5.84 | 

During
the quarter ended December 31, 2008, we repurchased shares of common stock to
satisfy income tax withholding obligations upon vesting of outstanding
restricted share awards with employees.

Shares
purchase activity for the fourth quarter of fiscal 2008 was as follows:

|                  |  |                                    |  |                       |  |                                                                                         |  |                                                                                              |  |  |  |  | 
|----------------- |  | ---------------------------------- |  | --------------------- |  | --------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------- |  |  |  |  | 
|Date              |  | Total Number
 of Shares
 Purchased |  | Price Paid
 per Share |  | Total Number of Shares
 Purchased
 as Part of a Publicly
 Announced Plans or 
 Programs |  | Approximate Dollar
 Value of Shares that
 May Yet be Purchased
 Under the Plans or
 Programs | 
|October 20,
 2008 |  | 817                                |  | $7.14                 |  |                                                                                        |  |                                                                                             | 

Holders

As of
December 31, 2008, we had 152 shareholders of record. Such number of record
holders does not reflect shareholders who beneficially own common stock in
nominee or street name.

Dividends

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

The
following graph shows a comparison of cumulative total returns for our common
stock, the NASDAQ Stock Market Index (U.S.) and the NASDAQ Medical Industry
Index (Medical Devices, Instruments and Supplies), assuming the investment of
$100 in our common stock and each index on December 31, 2003 and the
reinvestment of dividends, if any.

21

---



(LINE GRAPH)

ITEM 6. SELECTED FINANCIAL DATA

The
following selected financial data as of December 31, 2008 and 2007 and for the
three years ended December 31, 2008, 2007 and 2006 are derived from, and should
be read together with, our consolidated financial statements included elsewhere
in this Form 10-K. The following selected financial data as of December 31,
2006, 2005 and 2004 and for the fiscal years ended December 31, 2005 and 2004
are derived from consolidated financial statements not included herein. The
information set forth below should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of Operations, the
Consolidated Financial Statements and Notes thereto and other financial
information included elsewhere in this Form 10-K.

22

---



|                                                      |  |                                           |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|----------------------------------------------------- |  | ----------------------------------------- | ------ | ---- | - | ------ | - | ---- | ------ | ---- | - | ------ | - | - | ------ | -
|                                                      |  | Year Ended December 31,                   |       
|                                                      |  | 2008                                      |        | 2007 |   | 2006   |   | 2005 |        | 2004 |  
|                                                      |  | (in thousands, except per share
 amounts) |       
|Statements of Operations Data:                        |  |                                           |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Revenue:                                              |  |                                           |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Product revenue                                       |  | $                                         | 59,757 |      | $ | 51,414 |   | $    | 43,310 |      | $ | 32,786 |   | $ | 22,414 |  
|License and collaboration
 revenue                    |  |                                           | 1,464  |      |   | 1,450  |   |      |       |      |   |       |   |   |       |  
|Total revenue                                         |  |                                           | 61,221 |      |   | 52,864 |   |      | 43,310 |      |   | 32,786 |   |   | 22,414 |  
|                                                      |  |                                           |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Product costs and operating
 expenses:                |  |                                           |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Cost of sales                                         |  |                                           | 20,690 |      |   | 17,002 |   |      | 14,231 |      |   | 9,386  |   |   | 6,757  |  
|Cost of sales related to
 thrombin inventory          |  |                                           | 670    |      |   |       |   |      |       |      |   |       |   |   |       |  
|Collaboration expenses                                |  |                                           | 632    |      |   | 685    |   |      |       |      |   |       |   |   |       |  
|Research and development                              |  |                                           | 6,333  |      |   | 5,481  |   |      | 4,578  |      |   | 3,789  |   |   | 3,401  |  
|Clinical and regulatory                               |  |                                           | 3,220  |      |   | 3,168  |   |      | 2,493  |      |   | 2,006  |   |   | 1,906  |  
|Sales and marketing                                   |  |                                           | 20,482 |      |   | 19,603 |   |      | 17,097 |      |   | 13,681 |   |   | 11,360 |  
|General and administrative                            |  |                                           | 4,695  |      |   | 5,304  |   |      | 3,716  |      |   | 2,810  |   |   | 2,138  |  
|Thrombin qualification                                |  |                                           |       |      |   | 147    |   |      | 2,802  |      |   | 1,620  |   |   | 210    |  
|Litigation                                            |  |                                           | 1,484  |      |   | 5,800  |   |      |       |      |   |       |   |   |       |  
|Amortization of purchased
 technology                 |  |                                           |       |      |   |       |   |      | 72     |      |   | 218    |   |   | 218    |  
|Total product costs and
 operating expenses           |  |                                           | 58,206 |      |   | 57,190 |   |      | 44,989 |      |   | 33,510 |   |   | 25,990 |  
|Operating income (loss)                               |  |                                           | 3,015  |      |   | (4,326 | ) |      | (1,679 | )    |   | (724   | ) |   | (3,576 | )
|                                                      |  |                                           |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Other income (expenses):                              |  |                                           |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Interest income                                       |  |                                           | 203    |      |   | 444    |   |      | 99     |      |   | 163    |   |   | 68     |  
|Interest expense                                      |  |                                           | (62    | )    |   | (148   | ) |      | (206   | )    |   |       |   |   |       |  
|Foreign exchange loss                                 |  |                                           | (28    | )    |   |       |   |      |       |      |   |       |   |   |       |  
|                                                      |  |                                           |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Income (loss) before income
 taxes                    |  |                                           | 3,128  |      |   | (4,030 | ) |      | (1,786 | )    |   | (561   | ) |   | (3,508 | )
|                                                      |  |                                           |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Income tax benefit (expense)                          |  |                                           | 13,045 |      |   | (276   | ) |      |       |      |   |       |   |   |       |  
|Net income (loss)                                     |  | $                                         | 16,173 |      | $ | (4,306 | ) | $    | (1,786 | )    | $ | (561   | ) | $ | (3,508 | )
|Net income (loss) per common
 share  Basic           |  | $                                         | 1.04   |      | $ | (0.28  | ) | $    | (0.12  | )    | $ | (0.04  | ) | $ | (0.25  | )
|Net income (loss) per common
 share  Diluted         |  | $                                         | 1.01   |      | $ | (0.28  | ) | $    | (0.12  | )    | $ | (0.04  | ) | $ | (0.25  | )
|Weighted average number of
 common shares outstanding |  |                                           | 15,588 |      |   | 15,238 |   |      | 14,910 |      |   | 14,515 |   |   | 13,952 |  

|                                                                                      |  |                    |        |      |   |        |  |      |        |      |   |        |  |   |        | 
|------------------------------------------------------------------------------------- |  | ------------------ | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | - | ------ | 
|                                                                                      |  | As of December 31, |       
|                                                                                      |  | 2008               |        | 2007 |   | 2006   |  | 2005 |        | 2004 |  
|                                                                                      |  | (in thousands)     |       
|Balance Sheet Data:                                                                   |  |                    |        |      |   |        |  |      |        |      |   |        |  |   |        | 
|Cash, cash equivalents and
 available- for-sale securities (includes restricted cash) |  | $                  | 7,209  |      | $ | 10,759 |  | $    | 2,557  |      | $ | 4,282  |  | $ | 7,184  | 
|Working capital (includes
 restricted cash)                                           |  |                    | 22,677 |      |   | 14,530 |  |      | 11,472 |      |   | 10,887 |  |   | 11,833 | 
|Total assets                                                                          |  |                    | 44,180 |      |   | 31,278 |  |      | 20,967 |      |   | 19,896 |  |   | 16,822 | 
|Total shareholders equity                                                            |  |                    | 31,826 |      |   | 12,825 |  |      | 14,467 |      |   | 14,107 |  |   | 13,690 | 

23

---



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

The
following discussion of our financial condition and results of operations
should be read in conjunction with our Consolidated Financial Statements and
Notes thereto, and the other financial information included elsewhere in this
Form 10-K. This Managements Discussion and Analysis of Financial Condition and
Results of Operations contains descriptions of our expectations regarding
future trends affecting our business. These forward-looking statements and
other forward-looking statements made elsewhere in this document are made in
reliance upon safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Item 1A of Part I of this Form 10-K sets forth certain
factors we believe could cause actual results to differ materially from those
contemplated by the forward-looking statements.

Overview

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

Results of Operations

The
following table sets forth, for the periods indicated, certain items from our
statements of operations expressed as a percentage of net sales:

|                                                        |  |                         |     |      |  |      |    |  |     |   
|------------------------------------------------------- |  | ----------------------- | --- | ---- |  | ---- | -- |  | --- | --
|                                                        |  | Year Ended December 31, |    
|                                                        |  | 2008                    |     | 2007 |  | 2006 |   
|                                                        |  |                         |     |      |  |      |    |  |     |   
|Revenue:                                                |  |                         |     |      |  |      |    |  |     |   
|Product revenue                                         |  |                         | 98  | %    |  | 97   | %  |  | 100 | % 
|License and collaboration
 revenue                      |  |                         | 2   | %    |  | 3    | %  |  |    |   
|Total revenue                                           |  |                         | 100 | %    |  | 100  | %  |  | 100 | % 
|                                                        |  |                         |     |      |  |      |    |  |     |   
|Product costs and operating
 expenses:                  |  |                         |     |      |  |      |    |  |     |   
|Cost of sales                                           |  |                         | 34  | %    |  | 32   | %  |  | 33  | % 
|Cost of sales related to
 thrombin inventory            |  |                         | 1   | %    |  |     |    |  |    |   
|Collaboration expenses                                  |  |                         | 1   | %    |  | 1    | %  |  |    |   
|Research and development                                |  |                         | 10  | %    |  | 11   | %  |  | 11  | % 
|Clinical and regulatory                                 |  |                         | 5   | %    |  | 6    | %  |  | 6   | % 
|Sales and marketing                                     |  |                         | 34  | %    |  | 37   | %  |  | 39  | % 
|General and administrative                              |  |                         | 8   | %    |  | 10   | %  |  | 9   | % 
|Thrombin qualification                                  |  |                         |    |      |  |     |    |  | 6   | % 
|Litigation                                              |  |                         | 2   | %    |  | 11   | %  |  |    |   
|Total product costs and
 operating expenses             |  |                         | 95  | %    |  | 108  | %  |  | 104 | % 
|                                                       
|Operating income (loss)                                 |  |                         | 5   | %    |  | (8   | %) |  | (4  | %)
|                                                        |  |                         |     |      |  |      |    |  |     |   
|Interest income/expense and
 foreign exchange loss, net |  |                         |    |      |  | 1    | %  |  |    |   
|                                                        |  |                         |     |      |  |      |    |  |     |   
|Income (loss) before income
 taxes                      |  |                         | 5   | %    |  | (7   | %) |  | (4  | %)
|                                                        |  |                         |     |      |  |      |    |  |     |   
|Income tax benefit (expense)                            |  |                         | 21  | %    |  | (1   | %) |  |    |   
|Net Income (loss)                                       |  |                         | 26  | %    |  | (8   | %) |  | (4  | %)

24

---



Our
primary products are categorized into five product lines. The following table
sets forth, for the periods indicated, net revenue by product line along with
the change from the previous year:

|                        |  |                              |            |                 |  |             |    |                 |            |             |  |                 |   |   |            |  |  |     |  
|----------------------- |  | ---------------------------- | ---------- | --------------- |  | ----------- | -- | --------------- | ---------- | ----------- |  | --------------- | - | - | ---------- |  |  | --- | -
|                        |  | For Years Ended December 31, |           
|                        |  | 2008                         |            | 2007            |  | 2006        |   
|                        |  | Net Revenue                  |            | Percent
 Change |  | Net Revenue |    | Percent
 Change |            | Net Revenue |  | Percent
 Change |  
|                        |  |                              |            |                 |  |             |    |                 |            |             |  |                 |   |   |            |  |  |     |  
|Hemostat products       |  | $                            | 23,475,000 |                 |  | (5          | %) | $               | 24,712,000 |             |  | 14              | % | $ | 21,709,000 |  |  | 9   | %
|Extraction catheters    |  |                              | 14,992,000 |                 |  | 36          | %  |                 | 11,016,000 |             |  | 22              | % |   | 9,058,000  |  |  | 42  | %
|Vein products           |  |                              | 10,035,000 |                 |  | 16          | %  |                 | 8,629,000  |             |  | 22              | % |   | 7,049,000  |  |  | 62  | %
|Specialty catheters     |  |                              | 4,563,000  |                 |  | 36          | %  |                 | 3,363,000  |             |  | 8               | % |   | 3,126,000  |  |  | 202 | %
|Access products         |  |                              | 5,561,000  |                 |  | 99          | %  |                 | 2,790,000  |             |  | 74              | % |   | 1,604,000  |  |  | 140 | %
|Other products          |  |                              | 1,131,000  |                 |  | 25          | %  |                 | 904,000    |             |  | 18              | % |   | 764,000    |  |  | 40  | %
|License & Collaboration |  |                              | 1,464,000  |                 |  | 1           | %  |                 | 1,450,000  |             |  | N/A             |   |   |           |  |  |    |  
|                        |  |                              |            |                 |  |             |    |                 |            |             |  |                 |   |   |            |  |  |     |  
|Total Net Revenue       |  | $                            | 61,221,000 |                 |  | 16          | %  | $               | 52,864,000 |             |  | 22              | % | $ | 43,310,000 |  |  | 32  | %

Year
ended December 31, 2008 compared to year ended December 31, 2007

Net
revenue increased to $61,221,000 for the year ended December 31, 2008 from
$52,864,000 for the year ended December 31, 2007. The increase in net revenue
was a result of an increased market penetration in all five of our product
categories as well as the introduction of new products. Approximately
$52,990,000 (87%) of our net revenue for the year ended December 31, 2008 was
generated from customers in the United States, while $8,231,000 (13%) of our
net revenue was generated from customers in international markets.

We
recognized $818,000 of licensing revenue during 2008 as the result of our
License Agreement and Device Supply Agreement with King, and our distribution
agreement with Nicolai in Germany. We also recognized $646,000 of collaboration
revenue in 2008 as a result of performing clinical and development work for
King under the Device Supply Agreement. We expect to recognize approximately
$900,000 of license revenue in 2009, and expect collaboration revenue will
continue in 2009 dependent upon our progress with our pre-clinical and clinical
projects for King.

Product
gross margin declined to 65% for the year ended December 31, 2008, compared to
67% for the year ended December 31, 2007 as the result of a shift in our
product mix. Gross margins vary substantially across our product lines,
resulting in variations to our overall product gross margin based on changes in
the selling mix of our product lines. We expect gross margins to be in the
range of 64% to 66% in 2009 based on our expectation of a similar shifting of
our selling mix of products in 2009 compared to 2008.

Cost
of sales related to thrombin inventory expenses were $670,000 for the year
ended December 31, 2008. Cost of sales related to thrombin inventory expenses
relate to a reserve we have recorded for the amount of thrombin we anticipate
expiring prior to being used in the manufacturing of our international hemostat
products. We do not anticipate incurring additional charges related to thrombin
inventory during 2009.

Collaboration
expenses were $632,000 for the year ended December 31, 2008, compared to
$685,000 for the year ended December 31, 2007. Collaboration expenses primarily
are the result of our collaboration revenue related to the pre-clinical and
clinical projects we are performing for King. We expect collaboration expenses
to be approximately 2% of revenue during 2009, dependent upon the timing of the
collaboration revenue.

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Research
and development expenses increased 16% to $6,333,000 for the year ended
December 31, 2008 from $5,481,000 for the year ended December 31, 2007. The
increase was the result of our continued emphasis on investment in research and
development, including an increase to 24 full-time employees in research and
development at December 31, 2008 compared to 20 at December 31, 2007. We expect
our continuing research and development expenses to be approximately 9% to 11%
of revenue during 2009 as we continue to pursue additional new products and we
continue to move our longer term development projects forward.

Clinical
and regulatory expenses increased 2% to $3,220,000 for the year ended December
31, 2008 from $3,168,000 for the year ended December 31, 2007. Clinical and
regulatory expenses fluctuate due to the timing of clinical studies and the
number of new products coming through the regulatory system. We expect clinical
and regulatory expenses to be approximately 4% to 5% of revenue during 2009.

Sales
and marketing expenses increased 4% to $20,482,000 for the year ended December
31, 2008 from $19,603,000 for the year ended December 31, 2007. The primary
reason for the increase in sales and marketing expenses was a $430,000, or 15%,
increase in our commissions paid to our direct sales force due to increased
sales in 2008 over 2007. We expect to maintain the same relative size of our
direct sales force during 2009 at between 85 and 90 full-time sales employees.
As a result, we expect our sales and marketing expenses to range from
approximately 33% to 34% of revenue at the beginning of 2009 to between 28% and
30% of revenue by the end of 2009.

General
and administrative expenses decreased 11% to $4,695,000 for the year ended
December 31, 2008 from $5,304,000 for the year ended December 31, 2007. The
decrease was primarily the result of lower legal fees of approximately $850,000
as all litigation was settled in the second quarter of 2008 (see Note 14 to the
Consolidated Financial Statements included in Item 8 of Part II of this Form
10-K). We expect general and administrative expenses to be approximately 6% to
7% of revenue during 2009.

Litigation
expense decreased 74% to $1,484,000 for the year ended December 31, 2008 from
$5,800,000 for the year ended December 31, 2007. In the second quarter of 2008
we recorded a litigation gain of $1,659,000 due to the settlement of our
litigation with Diomed (reflecting a reduction from the $5,245,000 litigation
expense incurred in 2007 due to the Diomed jury verdict) and a litigation
expense of $3,116,000 upon settlement of the litigation with VNUS (see Note 14
to the Consolidated Financial Statements included in Item 8 of Part II of this
Form 10-K). We did not recognize any gain resulting from the Marine Polymer
jury verdict during 2008 and will not until any cash, if any, is received.

Thrombin
qualification project expenses were $-0- for the year ended December 31, 2008
compared to $147,000 for the year ended December 31, 2007. On October 18, 2004,
we entered into a supply agreement with Sigma-Aldrich Fine Chemicals, an
operating division of Sigma-Aldrich, Inc. (Sigma) for the supply of thrombin to
us. Pursuant to the terms of the agreement, we have paid for certain
development costs of Sigma to allow Sigma to produce thrombin for our use. The
initial contract term ends after 10 years and is automatically extended for up
to five additional successive one year terms unless one party delivers notice
of termination at least one year prior to the scheduled termination of the
agreement. During the term of the agreement, Sigma has agreed not to sell
thrombin of the type developed for us under the agreement in or as a component
of a hemostatic product for medical use. We do not have any minimum purchase
requirements under the agreement; however, if we purchase less than three lots
of thrombin in any year then (1) Sigma will be released from its agreement not
to sell thrombin in or as a component of a hemostatic product for medical use,
and (2) Sigma will have the right to terminate the agreement upon 30 days notice.

The
Sigma contract was part of our plan to fully qualify a second source of
thrombin (in addition to the Thrombin-JMI® Supply Agreement
discussed in Agreements with King Pharmaceuticals, Inc. above) and to bring
the new thrombin through the regulatory process to be used in our hemostatic
products. We have purchased $2.7 million of thrombin from Sigma, of which we
have expensed approximately $0.4 million in our development work and used
approximately $0.3 million in product manufacturing. We received regulatory
approval in the first quarter of 2008 allowing us to use the Sigma thrombin in
our international hemostat products. A $0.7
million expense was incurred in the fourth quarter of 2008 relating to a
reserve recorded against our existing supply of Sigma thrombin due to the
uncertainty of whether this amount of thrombin will be utilized prior to
expiration of its shelf life. The remaining Sigma thrombin balance of $1.3
million at December 31, 2008 is expected to be used in our hemostat products
sold in international markets before expiration of its shelf life.

26

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As
described in Agreements with King Pharmaceuticals, Inc. above, in January
2007 we entered into the Thrombin-JMI® Supply Agreement in the
United States with King with a price fixed throughout the 10 year term,
adjusted for a producer price index tied to pharmaceuticals. The thrombin price
under the agreement is confidential information; however, the price reflects a
25% discount to the price we paid in the last year of our previous thrombin
supply agreement with King. The Thrombin-JMI® Supply Agreement does
not terminate or affect our ability to complete the qualification of our own
second thrombin source; however, with the near-term economic need to qualify a
second source eliminated, we will be able to evaluate and plan our continuing
expenses and steps on this project. We do not expect to incur any significant
thrombin qualification expenses in 2009.

Interest
income decreased to $203,000 for the year ended December 31, 2008 from $444,000
for the year ended December 31, 2007 primarily as a result of lower cash
balances following the litigation settlement payments made to Diomed and VNUS (see Legal Proceedings in Item 3 of Part I
of this Form 10-K).

Interest
expense decreased to $62,000 for the year ended December 31, 2008 from $148,000
for the year ended December 31, 2007 as a result of paying off our equipment
line of credit during the year ended December 31, 2008.

Foreign
exchange loss increased to $28,000 for the year ended December 31, 2008 from
$-0- for the year ended December 31, 2007. Effective April 1, 2008 we began to
sell our products to Nicolai (our German distributor) at prices denominated in
Euros. We also purchase a small number of inventory items at prices denominated
in Euros. As a result, we are exposed to foreign exchange movements during the
time between the shipment of the product and payment. We currently have terms
of net 60 days with our distributor and net 30 with our vendors under the
agreements providing for payments in Euros.

We
recorded an income tax benefit of $13,045,000 for the year ended December 31,
2008 compared to recorded income tax expense of $276,000 for the year ended
December 31, 2007.
We assess the likelihood that our deferred tax assets will be recovered from
future taxable income during the fourth quarter of each year. We consider
projected future taxable income and ongoing tax planning strategies in
assessing the amount of the valuation allowance necessary to offset our
deferred tax assets that will not be recoverable. Based upon managements
assessment of all available evidence, including our cumulative pretax net
income for fiscal years 2008 and 2007, estimates of future profitability and the
overall prospects of our business, we determined that it is more likely than
not that we will be able to realize a portion of our deferred tax assets in the
future, and as a result recorded a $13.2 million income tax benefit in the
fourth quarter of fiscal 2008. To determine the amount of the reduction in the
valuation allowance, we projected our income over the next five years, which approximates the ten-year life of our three most significant products at this time. The amount of the valuation
allowance reduction was based on our discounted projected taxable income. We will continue
to assess the potential realization of our deferred tax assets on an annual
basis or on an interim basis if circumstances warrant. If our actual results
and updated projections vary significantly from our prior estimates, we expect
to increase or decrease our valuation allowance against our gross deferred tax
assets. Any adjustment to our earnings for the deferred tax would occur in the
period we make the determination. With the exception of 2008 and 2007,
we have not generated any significant pre-tax income in any year and therefore
have not paid any federal income taxes since our inception in December 1996.
The adoption of FIN 48, Accounting
for Uncertainty in Income Taxes,has not impacted our operating
results since we have historically established a valuation allowance for the
full value of our deferred assets.

27

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As
of December 31, 2008, we had approximately $47.1 million and $4.9 million of
federal and state net operating loss carryforwards available to offset future
taxable income which begin to expire in the year 2019. As of December 31, 2008,
we also had federal and state research and development tax credit carryforwards
of approximately $4.3 million which begin to expire in the year 2012. As of December
31, 2008, we also had a foreign tax loss carryforward of approximately $1.6
million, which does not expire. Under the United States Tax Reform Act of 1986,
the amounts of and benefits from net operating loss carryforwards may be
impaired or limited in certain circumstances, including significant changes in
ownership interests. Future use of our existing net operating loss
carryforwards may be restricted due to changes in ownership or from future tax
legislation. We performed a section 382 change in ownership study during the
third quarter 2005 on our federal net operating loss carryforward, and
concluded that, as of the date of this study, we would have no limitations on
the net operating loss carryforward. We dont believe there have been any significant
ownership changes since the date of this testing, therefore there are no
restrictions at this time on the future use of our net operating loss
carryforwards.

Results of Operations

Year
ended December 31, 2007 compared to year ended December 31, 2006

Net
revenue increased to $52,864,000 for the year ended December 31, 2007 from
$43,310,000 for the year ended December 31, 2006. The increase in net revenue
was a result of an increased market penetration rate in all our product
categories as well as the introduction of new products. We recognized $647,000
of licensing revenue as the result of receiving $7,000,000 from King during
2007 as part of the License Agreement. We also recognized $803,000 of
collaboration revenue as a result of performing clinical and development work
for King under the Device Supply Agreement and performing development work for
a third party company. Approximately $46,081,000 (87%) of our net revenue for
the year ended December 31, 2007 was generated from customers in the United
States, while $6,783,000 (13%) of our net revenue was generated from customers
in international markets.

Product
gross margin remained at 67% for the year ended December 31, 2007 as the result
of a relatively similar product mix and product cost structure as in the year
ended December 31, 2006. Gross margins vary substantially across our product
lines, resulting in variations to our overall product gross margin based on
changes in the selling mix of our product lines.

Collaboration
expenses were new to our financial statements in 2007 and were $685,000 for the
year ended December 31, 2007. Collaboration expenses are the result of our
collaboration revenue related to the pre-clinical and clinical work we are
performing for King. The 2007 expenses also include the product development
expenses related to the work done for a third party company.

Research
and development expenses increased 20% to $5,481,000 for the year ended
December 31, 2007 from $4,578,000 for the year ended December 31, 2006. The
increase was the result of our continued emphasis on investment in research and
development, including an increase to 20 full-time employees in research and
development at December 31, 2007 compared to 18 at December 31, 2006.

Clinical
and regulatory expenses increased 27% to $3,168,000 for the year ended December
31, 2007 from $2,493,000 for the year ended December 31, 2006. The primary
reason for the increase was the increase in the number of full-time employees
to 32 in clinical, quality and regulatory functions at December 31, 2007
compared to 28 at December 31, 2006.

Sales
and marketing expenses increased 15% to $19,603,000 for the year ended December
31, 2007 from $17,097,000 for the year ended December 31, 2006. The primary
reason for the increase in sales and marketing expenses was the increase in our
direct sales force to 89 employees at the end of 2007 compared to 82 as of
December 31, 2006. Variable compensation including commissions paid to our direct
sales force increased by 25% in 2007 compared to 2006 as sales increased.

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General
and administrative expenses increased 43% to $5,304,000 for the year ended
December 31, 2007 from $3,716,000 for the year ended December 31, 2006. The increase
was primarily the result of legal fees in the amount of approximately $1.5
million relating to the Diomed, VNUS and Marine Polymer litigation combined, an
increase of $1.0 million from 2006 (see Note 14 to the Consolidated Financial
Statements included in Item 8 of Part II of this Form 10-K).

Litigation
expense was $5,800,000 for the year ended December 31, 2007. The Diomed trial
commenced on March 12, 2007 and concluded on March 28, 2007 when the jury
reached a verdict that we had contributed to and induced infringement of
Diomeds patent and awarded monetary damages in the amount of $4,100,000, plus
pre-judgment interest (see Note 14 to the Consolidated Financial Statements
included in Item 8 of Part II of this Form 10-K). To settle Diomeds claims for
pre-judgment interest and for additional damages for sales not considered by
the jury, we agreed to amend the judgment amount to $4,975,000 and accrued this
amount together with additional costs and attorneys fees as of June 30, 2007
in the aggregate amount of $5,690,000.

Thrombin
qualification project expenses were $147,000 for the year ended December 31,
2007 compared to $2,802,000 for the year ended December 31, 2006.

Amortization
of purchased technology was $0 during the year ended December 31, 2007 compared
to $72,000 during the year ended December 31, 2006. The amortization resulted
from our acquisition of the Acolysis assets from the secured creditors of
Angiosonics, Inc. in 2002. We allocated $870,000 from the acquisition to
purchased technology that was amortized over four years and completed in April
2006.

Interest
income increased to $444,000 for the year ended December 31, 2007 from $99,000
for the year ended December 31, 2006 primarily as a result of higher cash
balances due to the $7.0 million in licensing and milestone payments we
received from King in 2007.

Interest
expense decreased to $148,000 for the year ended December 31, 2007 from
$206,000 for the year ended December 31, 2006 as a result of continued payments
of principal on our equipment line of credit.

Income
tax expense was $276,000 for the year ended December 31, 2007, primarily the
result of federal and state alternative minimum tax (AMT). We incurred income
tax expense in 2007 despite our loss before income taxes of $4,030,000 due to
the recognition for tax purposes of the $7,000,000 in milestone and licensing
payments from King and the delay in recognition for tax purposes of the
$5,219,000 judgment in the Diomed litigation pending our appeal.

Liquidity and Capital Resources

We
have financed substantially all of our operations since inception through the
issuance of equity securities and, to a lesser extent, sales of our products.
Through December 31, 2008, we have sold capital stock generating aggregate net
proceeds of approximately $81.2 million. At December 31, 2008, we had
$7,209,000 in cash and cash equivalents on-hand, compared to $10,759,000 in
cash and cash equivalents at December 31, 2007.

During
the year ended December 31, 2008 we used $2,285,000 in cash as a result of
operating activities, we incurred net capital expenditures in the amount of
$1,536,000, and we generated $296,000 in cash from financing activities.
Operating cash used was primarily the result of the litigation settlement
payments made to Diomed and VNUS totaling $7.3 million. Financing activities
consisted of $1,163,000 received through the sale of common stock upon the
exercise of outstanding stock options, stock warrants and issuances under
employee stock plans, which was reduced by $867,000 in debt payments to pay-off
our $2 million equipment line. Capital expenditures included leasehold
improvements for our expansion build-out as we leased the remaining 37,000 square
feet of space in one of our leased buildings in September 2008 and constructed
a new clean room, constructed a new training room, and purchased manufacturing
automation equipment.

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We
have a $10 million revolving line of credit with Silicon Valley Bank, which has
a 24-month term and bears interest at the rate equal to the greater of prime
plus 0.5% or 7.25% and is secured by a first security interest on all of our
assets. Our previous $2 million equipment line of credit was cancelled when it
was paid-in-full during fiscal 2008. The credit facility includes three
covenants: a minimum of $10 million in tangible net worth, a minimum of $3
million of unrestricted cash in deposit accounts with Silicon Valley Bank and
an adjusted net income for each financial reporting period. The adjusted net
income covenant requires an adjusted net income greater than $500,000 for each
rolling three month period for the remaining term of the agreement. The amount
required as a minimum tangible net worth will increase by an amount equal to
the sum of 50% of the Companys quarterly net profit and all consideration
received by the Company upon the issuance of equity securities. The minimum
tangible net worth requirement at December 31, 2008 was $19,642,000. We were in
compliance with all of the covenants on December 31, 2008. As of December 31,
2008, we had no outstanding balance on the $10 million revolving line of credit
with an availability of $10.0 million.

The
following table summarizes our contractual cash commitments as of December 31,
2008:

|                           |  |                        |           |                    |   |             |  |             |           |                    |   |           |  |   |           | 
|-------------------------- |  | ---------------------- | --------- | ------------------ | - | ----------- |  | ----------- | --------- | ------------------ | - | --------- |  | - | --------- | 
|                           |  | Payments Due by Period |          
|Contractual
 Obligations   |  | Total                  |           | Less than 
 1 year |   | 1 - 3 years |  | 3 - 5 years |           | More than
 5 years |  
|Facility
 operating leases |  | $                      | 5,430,000 |                    | $ | 749,000     |  | $           | 1,558,000 |                    | $ | 1,650,000 |  | $ | 1,473,000 | 

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

We
currently anticipate that we will experience positive cash flow from our normal
operating activities for the foreseeable future. We currently believe that our
working capital of $22.7 million at December 31, 2008 will be sufficient to
meet all of our operating and capital requirements for the foreseeable future.
However, our actual liquidity and capital requirements will depend upon
numerous unpredictable factors, including the amount of revenues from sales of
our existing and new products; the cost of maintaining, enforcing and defending
patents and other intellectual property rights; competing technological and
market developments; developments related to regulatory and third party
reimbursement matters; and other factors.

If
cash generated from operations is insufficient to satisfy our cash needs, we
may be required to raise additional funds. In the event that additional
financing is needed, and depending on market conditions, we may seek to raise
additional funds for working capital purposes through the sale of equity or
debt securities. There is no assurance such financing will be available on
terms acceptable to us or available at all.

Critical Accounting Policies

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

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

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Inventory

We
state our inventory at the lower of cost (first-in, first-out method) or
market. The estimated value of excess, obsolete and slow-moving inventory as
well as inventory with a carrying value in excess of its net realizable value
is established by us on a quarterly basis through review of inventory on hand
and assessment of future demand, anticipated release of new products into the
market, historical experience and product expiration. Our stated value of
inventory could be materially different if demand for our products decreased
because of competitive conditions or market acceptance, or if products become
obsolete because of advancements in the industry. We have approximately $1.3 million of Sigma
thrombin in inventory at December 31, 2008, which we expect to use in our
hemostat products sold in international markets. We received regulatory
approval in February 2008 allowing us to use the Sigma thrombin in our
international hemostat products. In the fourth quarter of 2008 we wrote-off
$670,000 of our Sigma thrombin which we expect will expire before we are able
to use it. We will continue to review our Sigma thrombin needs and we will
write-off any amounts we anticipate will not be used.

Revenue Recognition

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

We
also generate revenues from license agreements and research collaborations and
recognizes these revenues when earned. In accordance with Emerging Issues Task
Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables,
for deliverables which contain multiple deliverables, the Company separates the
deliverables into separate accounting units if they meet the following
criteria: (i) the delivered items have a stand-alone value to the customer;
(ii) the fair value of any undelivered items can be reliably determined; and
(iii) if the arrangement includes a general right of return, delivery of the
undelivered items is probable and substantially controlled by the seller.
Deliverables that do not meet these criteria are combined with one or more
other deliverables into one accounting unit. Revenue from each accounting unit
is recognized based on the applicable accounting literature, primarily Staff
Accounting Bulletin (SAB) 104, Revenue Recognition.

Effective
April 1, 2008 we entered into a five-year distribution agreement with Nicolai,
GmbH. As a result of entering into this distribution agreement, we no longer
maintain a direct sales force in Germany. In connection with this distribution
agreement, we received four installment payments of 125,000 Euros from Nicolai,
GmbH. The first of these four installment payments was due upon execution of
the agreement and was received on March 14, 2008. The second installment
payment was earned on June 30, 2008 and was received on July 9, 2008. The third
installment payment was earned on September 30, 2008 and was received on
October 3, 2008. The final installment payment was earned and received on
December 31, 2008. The installment payments are deferred and recognized ratably
over the five-year term of the distribution agreement. The distribution
agreement also includes provisions requiring us to pay Nicolai, GmbH specific
amounts if we terminate the distribution agreement prior to the end of the
five-year term. We do not intend to terminate the distribution agreement and,
as such, have not recorded a liability relating to these potential future
payments to Nicolai, GmbH.

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On
January 9, 2007, we entered into three separate agreements with King,
consisting of a License Agreement, a Device Supply Agreement and a Thrombin-JMI®
Supply Agreement. We licensed the exclusive rights to our products Thrombi-Pad,
Thrombi-Gel and Thrombi-Paste to King for a one-time payment of $6 million. We
continue to manufacture the licensed products for sale to King under the Device Supply Agreement. The Device
Supply Agreement requires King to pay us a $1 million milestone payment upon
the first commercial sale of Thrombi-Gel and again upon the first commercial
sale of Thrombi-Paste. On May 30, 2007 we received the first $1 million payment
related to Kings first commercial sale of Thrombi-Pad. We are amortizing the
$6 million license fee received on January 9, 2007 and the $1 million milestone
payment received on May 30, 2007 on a straight-line basis over the remaining 10
years. We also expect to amortize the second $1 million milestone payment over
the remaining 10-year license period from the date it is received.

As
part of the Device Supply Agreement, we agreed to conduct clinical studies for
Thrombi-Gel and Thrombi-Paste, with the expected costs related to the clinical
studies to be paid by King. Additionally, on May 18, 2007, we entered into a
Product Development & Supply Agreement with a third party company by which
we agreed to develop, manufacture and sell to this company a specialty version
of our Twin-Pass dual access catheter, with the costs related to the
development paid by this company. We have recognized collaboration revenue on
these development agreements as it was earned under the agreements with King
and the third party company.

In
addition, we have reviewed the provisions of EITF Issue No. 07-01, Accounting
for Collaborative Arrangements,and believe the adoption of this
EITF will have no impact on the amounts recorded under these agreements.

We
analyze the rate of historical returns when evaluating the adequacy of the
allowance for sales returns, which is included with the allowance for doubtful
accounts on our balance sheet. At December 31, 2008, this reserve was $25,000
compared to $40,000 at December 31, 2007. If the historical data we use to
calculate these estimates does not properly reflect future returns, revenue
could be overstated.

Allowance for
Doubtful Accounts

We
maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. This allowance is
regularly evaluated by us for adequacy by taking into consideration factors
such as past experience, credit quality of the customer base, age of the
receivable balances, both individually and in the aggregate, and current
economic conditions that may affect a customers ability to pay. At December
31, 2008, this reserve was $95,000 compared to $90,000 at December 31, 2007. If
the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.

Warranty Costs

We
provide a warranty for certain products against defects in material and
workmanship for periods of up to 24 months. We record a liability for warranty
claims at the time of sale. The amount of the liability is based on the amount
we are charged by our original equipment manufacturer to cover the warranty
period. The original equipment manufacturer includes a one year warranty with
each product sold to us. We record a liability for the uncovered warranty
period offered to a customer, provided the warranty period offered exceeds the
initial one year warranty period covered by the original equipment
manufacturer. At December 31, 2008, this warranty provision was $49,000
compared to $34,000 at December 31, 2007. If the assumptions used in
calculating the provision were to materially change, resulting in more defects
than anticipated, an additional provision may be required.

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Income Taxes

The
carrying value of our net deferred tax assets assumes that we will be able to
generate sufficient taxable income in the United States based on estimates and
assumptions. We record a valuation allowance to reduce the carrying value of
our net deferred tax asset to the amount that is more likely than not to be
realized. For the year ended December 31, 2008, we recorded a $14.1 million
valuation allowance and a $597,000 reserve related to our net deferred tax
assets of $27.8 million as a result of our adoption of Financial Accounting
Standards Board Interpretation 48 (FIN 48), Accounting for Uncertainty in Income Taxes  an
Interpretation of FASB Statement No. 109. At December 31, 2008,
we have accrued $-0- for the payment of tax related interest and there was no
tax interest or penalties recognized in the statements of operations. Based
upon managements assessment of all available evidence, including our
cumulative pretax net income for fiscal years 2008 and 2007, estimates of
future profitability and the overall prospects of our business, we determined
that it is more likely than not that we will be able to realize a portion of
our deferred tax assets in the future, and as a result recorded a $13.2 million
income tax benefit in the fourth quarter of fiscal 2008. To determine the
amount of the reduction in the valuation allowance, we projected our income
over the next five years, which approximates the ten-year life of our three most significant products at this time. The amount of the valuation allowance reduction was based on our
discounted projected taxable income. We will continue to assess the potential realization
of our deferred tax assets on an annual basis, or on an interim basis if
circumstances warrant. If our actual results and updated projections vary
significantly from our projections, we would need to increase or decrease our
valuation allowance against our gross deferred tax assets. We would adjust our
earnings for the deferred tax in the period we make the determination.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK

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

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

In
the United States and Germany, we sell our products directly to hospitals and
clinics in the local currency. Product revenue recognized on sales in Germany
represented approximately 1.0% of our total product revenue for the year ended
December 31, 2008. Effective April 1, 2008, all Germany sales were transferred
to the international distributor Nicolai, GmbH. Any exposure to currency
exchange rates on this volume of product sales in Germany would be considered
immaterial to the financial statements.

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

We
do not believe our operations are currently subject to significant market risks
for interest rates, foreign currency exchange rates, commodity prices or other
relevant market price risks of a material nature. As we have earned and
received all installment payments of 125,000 Euros pursuant to the terms of our
distribution agreement with Nicolai, GmbH before the end of 2008, there is no
further exposure to fluctuations in the Euro related to this agreement. A
change of 0.1 in the Euro exchange would result in an increase or decrease of
approximately $18,000 in the amount of United States dollars we receive in
payment on accounts receivable from Nicolai, GmbH. Under our current policies,
we do not use foreign currency derivative instruments to manage exposure to
fluctuations in the Euro exchange rate.

We
currently have no indebtedness, but if we were to borrow amounts from our
revolving credit line, we would be exposed to changes in interest rates.
Advances under our revolving credit line bear interest at an annual rate
indexed to prime. We will thus be exposed to interest rate risk with respect to
amounts outstanding under the line of credit to the extent that interest rates
rise. As we had no amounts outstanding on the line of credit at December 31,
2008, we have no exposure to interest rate changes on this credit facility.
Under our current policies, we do not use interest rate derivative instruments to
manage exposure to interest rate changes. Additionally, we will be exposed to
declines in the interest rates paid on deposited funds. A 1% decline in
the current market interest rates paid on deposits would result in interest
income being reduced by approximately $72,000 on an annual basis.

33

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ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The
Consolidated Financial Statements and Notes thereto required pursuant to this
Item begin on page 41 of this Annual Report on Form 10-K.

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of
Disclosure Controls and Procedures.

Under
the supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were effective.

Changes in Internal
Controls.

During
the fiscal quarter ended December 31, 2008, there has been no change in our
internal control over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act) that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

Managements Report
on Internal Control Over Financial Reporting.

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

Under
the supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, we conducted an evaluation
of the effectiveness of our internal control over financial reporting based on
the framework in Internal Control - Integrated Frameworkissued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on our
evaluation under the framework in Internal Control  Integrated Framework,
our management concluded that our internal control over financial reporting was
effective as of December 31, 2008.

Virchow,
Krause & Company, LLP, an independent registered public accounting firm,
has issued an attestation report on our internal control over financial
reporting as of December 31, 2008.

Attestation Report of
Independent Registered Public Accounting Firm.

Virchow,
Krause & Company, LLP, an independent registered public accounting firm,
has issued an attestation report on our internal control over financial
reporting as of December 31, 2008. The attestation report of Virchow, Krause
& Company, LLP, on our internal control over financial reporting as of
December 31, 2008 is included on page 43 and incorporated by reference herein.

34

---



ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPRATE GOVERNANCE

Incorporated
herein by reference to the Sections under the headings Proposal 1: Election of
Directors, Committees of the Board of Directors and Section 16(a)
Beneficial Ownership Reporting Compliance contained in the Proxy Statement for
our Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the year ended December 31, 2008.

See the
section under the heading Executive Officers of the Registrant in Item 1 of Part
I herein for information regarding our executive officers.

Code
of Ethics

We
have adopted a code of ethics that applies to all of our directors, officers
(including our chief executive officer, chief financial officer, chief
accounting officer, and any person performing similar functions) and employees.
We have made our Code of Ethics available by filing it as Exhibit 14 to our
Form 8-K dated January 29, 2008, which exhibit is incorporated by reference as
an exhibit to this Annual Report on Form 10-K.

ITEM 11.
EXECUTIVE COMPENSATION

Incorporated
herein by reference to the Sections under the headings Director Compensation
and Executive Compensation contained in the Proxy Statement for our Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
within 120 days of the close of the year ended December 31, 2008.

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

Incorporated
herein by reference to the Section under the heading Security Ownership of
Certain Beneficial Owners and Management contained in the Proxy Statement for
our Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the year ended December 31, 2008.

35

---



Equity
Compensation Plans

The
following table sets forth the securities authorized to be issued under our
current equity compensation plans as of December 31, 2008:

|                                                            |  |                                                                                         |           |                                                                      |   |                                                                                                                                               |  |  |           |       
|----------------------------------------------------------- |  | --------------------------------------------------------------------------------------- | --------- | -------------------------------------------------------------------- | - | --------------------------------------------------------------------------------------------------------------------------------------------- |  |  | --------- | ------
|Plan
 category                                              |  | Number of
 securities to be
 issued upon
 exercise of
 outstanding
 options and
 rights |           | Weighted-average
 exercise price of
 outstanding options and
 rights |   | Number of securities
 remaining available for
 future issuance under
 equity compensation
 plans (excluding
 outstanding options
 and rights) | 
|Equity compensation plans approved by
 security holders     |  |                                                                                         | 1,246,000 |                                                                      | $ | 5.84                                                                                                                                          |  |  | 3,378,000 | (1)(2)
|                                                           
|Equity compensation plans not approved by
 security holders |  |                                                                                         | None      |                                                                      |   | None                                                                                                                                          |  |  | None      |       
|                                                           
|Total                                                       |  |                                                                                         | 1,246,000 |                                                                      | $ | 5.84                                                                                                                                          |  |  | 3,378,000 |       

|    |                                                                                                                                                                                                                                                                         |   |                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------------------------------------------------------------------------------------------------
|(1) | Includes
 2,586,000 shares reserved and available for issuance under our Stock Option
 and Stock Award Plan. The shares available for issuance under our Stock
 Option and Stock Award Plan automatically increases on an annual basis
 through 2016, by the lesser of:
|    |                                                                                                                                                                                                                                                                         |   |                                                                                                 
|    |                                                                                                                                                                                                                                                                         |  | 500,000
 shares;                                                                                
|    |                                                                                                                                                                                                                                                                         |   |                                                                                                 
|    |                                                                                                                                                                                                                                                                         |  | 5% of the
 common-equivalent shares outstanding at the end of our prior fiscal year; or         
|    |                                                                                                                                                                                                                                                                         |   |                                                                                                 
|    |                                                                                                                                                                                                                                                                         |  | a smaller
 amount determined by our Board of Directors or the committee administering
 the plan.
|    |                                                                                                                                                                                                                                                                         |   |                                                                                                 
|(2) | Includes
 792,000 shares reserved and available for issuance under our Employee Stock
 Purchase Plan. The shares available for issuance under our Employee Stock
 Purchase Plan automatically increases on an annual basis through 2010, by the
 lesser of:            
|    |                                                                                                                                                                                                                                                                         |   |                                                                                                 
|    |                                                                                                                                                                                                                                                                         |  | 200,000
 shares;                                                                                
|    |                                                                                                                                                                                                                                                                         |   |                                                                                                 
|    |                                                                                                                                                                                                                                                                         |  | 2% of the
 common-equivalent shares outstanding at the end of our prior fiscal year; or         
|    |                                                                                                                                                                                                                                                                         |   |                                                                                                 
|    |                                                                                                                                                                                                                                                                         |  | a smaller
 amount determined by our Board of Directors or the committee administering
 the plan.

ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Incorporated
herein by reference to the Sections under the headings Related Person
Transaction Policy and Proposal 1: Election of Directors contained in the
Proxy Statement for our Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission within 120 days of the close of the year
ended December 31, 2008.

ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES

Incorporated
herein by reference to the Section under the heading Additional Information
about our Independent Registered Public Accounting Firm contained in the Proxy
Statement for our Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission within 120 days of the close of the year
ended December 31, 2008.

36

---



PART IV

ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Documents filed as part of this Report.

|    |                                                                              |                                                           
|--- | ---------------------------------------------------------------------------- | ----------------------------------------------------------
|(1) | The following financial statements are filed herewith in Item 8 in
 Part II.
|    |                                                                             
|    | (i)                                                                          | Reports of Independent Registered Public Accounting Firm  
|    |                                                                              |                                                           
|    | (ii)                                                                         | Consolidated Balance Sheets                               
|    |                                                                              |                                                           
|    | (iii)                                                                        | Consolidated Statements of Operations                     
|    |                                                                              |                                                           
|    | (iv)                                                                         | Consolidated Statements of Changes in Shareholders Equity
|    |                                                                              |                                                           
|    | (v)                                                                          | Consolidated Statements of Cash Flows                     
|    |                                                                              |                                                           
|    | (vi)                                                                         | Notes to Consolidated Financial Statements                
|    |                                                                              |                                                           
|(2) | Financial Statement Schedules                                               

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

|    |         
|--- | --------
|(3) | Exhibits

|                |  |                                                                                                                                                                                                                                                                         | 
|--------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|Exhibit
 Number |  | Description                                                                                                                                                                                                                                                             | 
|3.1             |  | Amended and
 Restated Articles of Incorporation of Vascular Solutions, Inc. (incorporated
 by reference to Exhibit 3.1 to Vascular Solutions Form 10-Q for the quarter
 ended September 30, 2000).                                                                    
|3.2             |  | Amended and
 Restated Bylaws of Vascular Solutions, Inc. (incorporated by reference to
 Exhibit 3.1 of Vascular Solutions Form 8-K dated October 19, 2007).                                                                                                           
|4.1             |  | Specimen of
 Common Stock certificate (incorporated by reference to Exhibit 4.1 of
 Vascular Solutions Registration Statement on Form S-1 (File No. 333-84089)).                                                                                                      
|10.1            |  | Lease
 Agreement dated August 30, 2002 by and between First Industrial, L.P. as
 Landlord and Vascular Solutions, Inc. as Tenant (incorporated by reference to
 Exhibit 10.1 of Vascular Solutions Form 10-Q for the quarter ended September
 30, 2002).              
|10.2            |  | Lease
 Agreement dated December 28, 2006 by and between IRET - Plymouth, LLC as
 Landlord and Vascular Solutions, Inc. as Tenant (incorporated by reference to
 Exhibit 10.4 of Vascular Solutions Form 10-K for the year ended December 31,
 2006).                  
|10.3            |  | Amendment to
 Lease Agreement, dated November 12, 2007, by and between IRET - Plymouth, LLC
 as Landlord and Vascular Solutions, Inc. as Tenant (incorporated by reference
 to Exhibit 99.1 of Vascular Solutions Form 8-K dated November 14, 2007).                  
|10.4            |  | Amendment to
 Lease Agreement, dated November 12, 2007, by and between IRET  Plymouth, LLC
 as Landlord and Vascular Solutions, Inc. as Tenant (incorporated by reference
 to Exhibit 99.2 of Vascular Solutions Form 8-K dated November 14, 2007).                  
|10.5            |  | Mutual and
 General Release dated November 9, 1998 by and between Vascular Solutions,
 Inc., Dr. Gary Gershony and B. Braun Medical, Inc. (incorporated by reference
 to Exhibit 10.5 of Vascular Solutions Registration Statement on Form S-1
 (File No. 333-84089)).
|10.6            |  | Purchase and
 Sale Agreement dated September 17, 1998 by and between Vascular Solutions,
 Inc. and Davol Inc. (incorporated by reference to Exhibit 10.8 of Vascular
 Solutions Registration Statement on Form S-1 (File No. 333-84089)).                             

37

---



|                |  |                                                                                                                                                                                                                                                                                                | 
|--------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|Exhibit
 Number |  | Description                                                                                                                                                                                                                                                                                    | 
|10.7*           |  | Form of
 Employment Agreement by and between Vascular Solutions, Inc. and each of its
 executive officers (incorporated by reference to Exhibit 10.5 of Vascular
 Solutions Form 10-Q for the quarter ended March 31, 2004).                                                                 
|10.8            |  | Form of
 Distribution Agreement (incorporated by reference to Exhibit 10.12 of
 Vascular Solutions Registration Statement on Form S-1 (File No. 333-84089)).                                                                                                                                 
|10.9*           |  | Vascular
 Solutions, Inc. Employee Stock Purchase Plan, as amended (incorporated by
 reference to Exhibit 10.14 to Vascular Solutions Form 10-K for the year
 ended December 31, 2000).                                                                                                      
|10.10*          |  | Stock Option
 and Stock Award Plan as Amended December 9, 2005 (incorporated by reference
 to Exhibit 10.1 of Vascular Solutions Form 8-K dated December 9, 2005).                                                                                                                           
|10.11**         |  | Supply
 Agreement dated October 18, 2004 by and between Vascular Solutions and
 Sigma-Aldrich Fine Chemicals, an operating division of Sigma-Aldrich, Inc.
 (incorporated by reference to Exhibit 10.12 to Vascular Solutions Form 10-K
 for the year ended December 31, 2004).              
|10.12**         |  | Amendment to
 Supply Agreement dated December 15, 2006 by and between Vascular Solutions
 and Sigma-Aldrich Fine Chemicals, an operating division of Sigma-Aldrich,
 Inc. (incorporated by reference to Exhibit 10.12 of Vascular Solutions Form
 10-K for the year ended December 31, 2006).
|10.13           |  | Loan and
 Security Agreement dated December 31, 2003 by and between Vascular Solutions
 and Silicon Valley Bank (incorporated by reference to Exhibit 10.14 of
 Vascular Solutions Form 10-K for the year ended December 31, 2003).                                                          
|10.14           |  | Amendment to
 Loan Agreement dated December 9, 2004 by and between Vascular Solutions and
 Silicon Valley Bank (incorporated by reference to Exhibit 10.15 of Vascular
 Solutions Form 10-K for the year ended December 31, 2004).                                                           
|10.15           |  | Amendment to
 Loan Agreement dated December 29, 2005 by and between Vascular Solutions and
 Silicon Valley Bank (incorporated by reference to Exhibit 10.14 of Vascular
 Solutions Form 10-K for the year ended December 31, 2005).                                                          
|10.16           |  | Amendment to
 Loan Agreement dated December 28, 2006 by and between Vascular Solutions and
 Silicon Valley Bank (incorporated by reference to Exhibit 10.17 of Vascular
 Solutions Form 10-K for the year ended December 31, 2006).                                                          
|10.17           |  | Amendment to
 Loan and Security Agreement dated April 23, 2007 by and between Vascular
 Solutions and Silicon Valley Bank (incorporated by reference to Exhibit 10.1
 of Vascular Solutions Form 10-Q for the quarter ended March 31, 2007).                                                 
|10.18           |  | Amendment to
 Loan Agreement dated December 26, 2007 by and between Vascular Solutions and
 Silicon Valley Bank (incorporated by reference to Exhibit 10.22 of Vascular
 Solutions Form 10-K for the year December 31, 2007).                                                                
|10.19*          |  | Form of
 Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.1
 of Vascular Solutions Form 8-K dated September 22, 2004).                                                                                                                                              
|10.20*          |  | Form of
 Nonqualified Stock Option Agreement (incorporated by reference to Exhibit
 10.2 of Vascular Solutions Form 8-K dated September 22, 2004).                                                                                                                                           
|10.21*          |  | Form of
 Board of Directors Stock Option Agreement, as amended December 9, 2005 (incorporated
 by reference to Exhibit 10.2 of Vascular Solutions Form 8-K dated December
 9, 2005).                                                                                                         
|10.22*          |  | Form of
 Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.3
 of Vascular Solutions Form 8-K dated December 9, 2005).                                                                                                                                                
|10.23           |  | License
 agreement dated January 9, 2007 by and between Vascular Solutions and King
 Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.22 of Vascular
 Solutions Form 10-K for the year ended December 31, 2006).                                                               
|10.24**         |  | Device
 Supply agreement dated January 9, 2007 by and between Vascular Solutions and
 King Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.23 of
 Vascular Solutions Form 10-K for the year ended December 31, 2006).                                                         

38

---



|                |  |                                                                                                                                                                                                                                                       | 
|--------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|Exhibit
 Number |  | Description                                                                                                                                                                                                                                           | 
|10.25**         |  | Thrombin-JMI®
 Supply Agreement dated January 9, 2007 by and between Vascular Solutions and
 King Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.24 of
 Vascular Solutions Form 10-K for the year ended December 31, 2006).         
|10.26*          |  | Vascular
 Solutions, Inc. Stock Option and Stock Award Plan, as amended January 25,
 2006, effective April 18, 2006 (incorporated by reference to Exhibit 10.1 of
 Vascular Solutions Form 10-Q for the quarter ended March 31, 2006).              
|10.27           |  | Settlement
 Agreement dated April 8, 2008 between Vascular Solutions, Inc. and Diomed,
 Inc. (incorporated by reference to Exhibit 10.1 of Vascular Solutions Form
 8-K dated April 10, 2008).                                                      
|10.2**          |  | Settlement
 Agreement dated June 2, 2008 among VNUS Medical Technologies, Inc.,
 AngioDynamics, Inc. and Vascular Solutions, Inc. (incorporated by reference
 to Exhibit 10.2 of Vascular Solutions Form 10-Q for the quarter ended June
 30, 2008).
|10.29*          |  | Separation
 Agreement and General Release, dated August 15, 2008, between Deborah L.
 Neymark and Vascular Solutions, Inc. (incorporated by reference to Exhibit
 10.1 of Vascular Solutions Form 8-K dated August 15, 2008).                       
|14              |  | Revised and
 Restated Code of Ethics (incorporated by reference to Exhibit 14 of Vascular
 Solutions Form 8-K dated January 29, 2008).                                                                                                              
|21              |  | List of
 Subsidiaries                                                                                                                                                                                                                                
|23.1            |  | Consent of
 Virchow, Krause & Company, LLP.                                                                                                                                                                                                          
|24.1            |  | Power of
 Attorney (included on signature page).                                                                                                                                                                                                     
|31.1            |  | Certification
 of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
 of 2002.                                                                                                                                                
|31.2            |  | Certification
 of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
 of 2002.                                                                                                                                                
|32.1            |  | Certification
 of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act
 of 2002.                                                                                                                                                
|32.2            |  | Certification
 of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
 of 2002.                                                                                                                                                

| | 
| | 
| | 

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


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


39

---



SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, on the 3rd day of
February 2009.

| |                           |                                      
| | ------------------------- | -------------------------------------
| | VASCULAR
 SOLUTIONS, INC.
|
| | By:                       | /s/ Howard
 Root                     
| |                           | Howard Root                          
| |                           | Chief
 Executive Officer and Director

KNOW
ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Howard Root and James Hennen (with full power to act
alone), as his true and lawful attorneys-in-fact and agents, with full powers
of substitution and resubstitution, for him and in his name, place and stead,
in any and all capacities, to sign any and all amendments to the Annual Report
on Form 10-K of Vascular Solutions, Inc. for the year ended December 31, 2008,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing requisite or necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or their substitute or substitutes, lawfully do or cause to be done
by virtue hereof.

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been signed on the 3rd day of February 2009, by the following
persons in the capacities indicated.

|                         |           |                                                                    |  |  |       | 
|------------------------ | --------- | ------------------------------------------------------------------ |  |  | ----- | 
|                         | Signature |                                                                    |  |  | Title | 
|                         |           |                                                                   
|/s/ Howard Root          |           | Chief
 Executive Officer and Director                             
|Howard Root              |           | (principal
 executive officer)                                    
|                         |           |                                                                   
|/s/ James Hennen         |           | Vice
 President, Finance and Chief Financial Officer and Secretary
|James Hennen             |           | (principal
 financial officer)                                    
|                         |           |                                                                   
|/s/ Timothy Slayton      |           | Controller                                                        
|Timothy Slayton          |           | (principal
 accounting officer)                                   
|                         |           |                                                                   
|/s/ Richard Nigon        |           | Director                                                          
|Richard Nigon            |           |                                                                   
|                         |           |                                                                   
|/s/ Michael Kopp         |           | Director                                                          
|Michael Kopp             |           |                                                                   
|                         |           |                                                                   
|/s/ Paul OConnell       |           | Director                                                          
|Paul OConnell           |           |                                                                   
|                         |           |                                                                   
|/s/ John Erb             |           | Director                                                          
|John Erb                 |           |                                                                   
|                         |           |                                                                   
|/s/ Dr. Jorge Saucedo    |           | Director                                                          
|Dr. Jorge Saucedo        |           |                                                                   
|                         |           |                                                                   
|/s/ Ms. Charmaine Sutton |           | Director                                                          
|Ms. Charmaine Sutton     |           |                                                                   

40

---



Report of Independent Registered Public
Accounting Firm

The Board of
Directors and Shareholders
Vascular Solutions, Inc.

Under date of
February 3, 2009, we reported on the consolidated balance sheets of Vascular
Solutions, Inc. as of December 31, 2008 and 2007, and the related consolidated
statements of operations, changes in shareholders equity, and cash flows for
each of the three years in the period ended December 31, 2008, as contained in
the annual report on Form 10-K for the year ended December 31, 2008. In
connection with our audits of the aforementioned consolidated financial statements,
we have also audited the related financial statement schedule as listed in the
accompanying index. This financial statement schedule is the responsibility of
the Companys management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.

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

|                        |                                    
|----------------------- | -----------------------------------
|                        | /s/ Virchow,
 Krause & Company, LLP
|                        |                                    
|Minneapolis,
 Minnesota |                                    
|February 3,
 2009       |                                    

41

---



SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

|                                |  |                               |         |                                             |   |                  |   |                          |          |   |   |         | 
|------------------------------- |  | ----------------------------- | ------- | ------------------------------------------- | - | ---------------- | - | ------------------------ | -------- | - | - | ------- | 
|Description                     |  | Balance at
 Beginningof
 Year |         | Additions
 Charged
 to Costs
 and
 Expenses |   | Less
 Deductions |   | Balance at
 End of
 Year |         
|                                |  |                               |         |                                             |   |                  |   |                          |          |   |   |         | 
|YEAR ENDED DECEMBER 31, 2008:   |  |                               |         |                                             |   |                  |   |                          |          |   |   |         | 
|Sales return allowance          |  | $                             | 40,000  |                                             | $ |                 |   | $                        | (15,000  | ) | $ | 25,000  | 
|Allowance for doubtful accounts |  |                               | 90,000  |                                             |   | 58,000           |   |                          | (53,000  | ) |   | 95,000  | 
|Total                           |  | $                             | 130,000 |                                             | $ | 58,000           |   | $                        | (68,000  | ) | $ | 120,000 | 
|                                |  |                               |         |                                             |   |                  |   |                          |          |   |   |         | 
|YEAR ENDED DECEMBER 31, 2007:   |  |                               |         |                                             |   |                  |   |                          |          |   |   |         | 
|Sales return allowance          |  | $                             | 45,000  |                                             | $ |                 |   | $                        | (5,000   | ) | $ | 40,000  | 
|Allowance for doubtful accounts |  |                               | 65,000  |                                             |   | 37,000           |   |                          | (12,000  | ) |   | 90,000  | 
|Total                           |  | $                             | 110,000 |                                             | $ | 37,000           |   | $                        | (17,000  | ) | $ | 130,000 | 
|                                |  |                               |         |                                             |   |                  |   |                          |          |   |   |         | 
|YEAR ENDED DECEMBER 31, 2006:   |  |                               |         |                                             |   |                  |   |                          |          |   |   |         | 
|Sales return allowance          |  | $                             | 30,000  |                                             | $ | 107,000          |   | $                        | (92,000  | ) | $ | 45,000  | 
|Allowance for doubtful accounts |  |                               | 110,000 |                                             |   | (16,000          | ) |                          | (29,000  | ) |   | 65,000  | 
|Total                           |  | $                             | 140,000 |                                             | $ | 91,000           |   | $                        | (121,000 | ) | $ | 110,000 | 

42

---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders, Audit
Committee and Board of Directors
Vascular Solutions, Inc.
Minneapolis, MN

We have audited the
accompanying consolidated balance sheets of Vascular Solutions, Inc. as of
December 31, 2008 and 2007, and the related consolidated statements of
operations, shareholders equity and cash flows for each of the years in the
three-year period ended December 31, 2008. We also have audited Vascular
Solutions, Inc.s internal control over financial reporting as of December 31, 2008,
based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Vascular Solutions,
Inc.s management is responsible for these consolidated financial statements,
for maintaining effective internal control over financial reporting, and for
its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Managements Report on Internal Control
Over Financial Reporting included in Item 9A Controls and Procedures. Our
responsibility is to express an opinion on these consolidated financial
statements and an opinion on the companys internal control over financial
reporting based on our audits.

We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our audits of the
consolidated financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.

A companys internal control
over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
consolidated financial statements for external purposes in accordance with
generally accepted accounting principles. A companys internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of consolidated financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the companys assets that could have a material effect on the consolidated
financial statements.

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

In our opinion, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Vascular Solutions, Inc. as of
December 31, 2008 and 2007, and the consolidated results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 2008 in conformity with accounting principles generally accepted
in the United States of America. Also in our opinion, Vascular Solutions, Inc.
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).

|                                   
|-----------------------------------
|/s/ Virchow, Krause &
 Company, LLP
|                                   
|Minneapolis, Minnesota             
|February 3, 2009                   

43

---



Vascular Solutions, Inc.

Consolidated Balance Sheets

|                                                                                                           |  |              |             |      |   |             |  
|---------------------------------------------------------------------------------------------------------- |  | ------------ | ----------- | ---- | - | ----------- | -
|                                                                                                           |  | December
 31 |            
|                                                                                                           |  | 2008         |             | 2007 |  
|Assets                                                                                                     |  |              |             |      |   |             |  
|Current assets:                                                                                            |  |              |             |      |   |             |  
|Cash and cash equivalents                                                                                  |  | $            | 7,209,000   |      | $ | 5,286,000   |  
|Restricted cash                                                                                            |  |              |            |      |   | 5,473,000   |  
|Accounts receivable, net of reserves of
 $120,000 and $130,000 at December 31, 2008 and 2007, respectively |  |              | 8,706,000   |      |   | 7,363,000   |  
|Inventories                                                                                                |  |              | 9,974,000   |      |   | 8,307,000   |  
|Prepaid expenses                                                                                           |  |              | 1,045,000   |      |   | 810,000     |  
|Current portion of deferred tax assets                                                                     |  |              | 2,680,000   |      |   |            |  
|Total current assets                                                                                       |  |              | 29,614,000  |      |   | 27,239,000  |  
|                                                                                                           |  |              |             |      |   |             |  
|Property and equipment, net                                                                                |  |              | 3,887,000   |      |   | 3,846,000   |  
|Intangible assets, net                                                                                     |  |              | 193,000     |      |   | 193,000     |  
|Deferred tax assets, net of current portion
 and liabilities                                               |  |              | 10,486,000  |      |   |            |  
|Total assets                                                                                               |  | $            | 44,180,000  |      | $ | 31,278,000  |  
|                                                                                                           |  |              |             |      |   |             |  
|Liabilities and shareholders equity                                                                       |  |              |             |      |   |             |  
|Current liabilities:                                                                                       |  |              |             |      |   |             |  
|Accounts payable                                                                                           |  | $            | 2,022,000   |      | $ | 2,021,000   |  
|Accrued compensation                                                                                       |  |              | 2,584,000   |      |   | 2,766,000   |  
|Accrued expenses                                                                                           |  |              | 848,000     |      |   | 936,000     |  
|Accrued royalties                                                                                          |  |              | 576,000     |      |   | 178,000     |  
|Litigation provision                                                                                       |  |              |            |      |   | 5,219,000   |  
|Current portion of long-term debt                                                                          |  |              |            |      |   | 800,000     |  
|Current portion of deferred revenue                                                                        |  |              | 907,000     |      |   | 789,000     |  
|Total current liabilities                                                                                  |  |              | 6,937,000   |      |   | 12,709,000  |  
|                                                                                                           |  |              |             |      |   |             |  
|Long-term liabilities:                                                                                     |  |              |             |      |   |             |  
|Long-term debt, net of current portion                                                                     |  |              |            |      |   | 67,000      |  
|Long-term deferred revenue, net of current
 portion                                                        |  |              | 5,417,000   |      |   | 5,649,000   |  
|Deferred tax liability                                                                                     |  |              |            |      |   | 28,000      |  
|Total long-term liabilities                                                                                |  |              | 5,417,000   |      |   | 5,744,000   |  
|                                                                                                           |  |              |             |      |   |             |  
|Commitments and contingencies                                                                              |  |              |             |      |   |             |  
|                                                                                                           |  |              |             |      |   |             |  
|Shareholders equity:                                                                                      |  |              |             |      |   |             |  
|Common stock, $0.01 par value:                                                                             |  |              |             |      |   |             |  
|Authorized shares  40,000,000                                                                             |  |              |             |      |   |             |  
|Issued and outstanding shares  16,027,519  2008; 15,606,656  2007                                       |  |              | 160,000     |      |   | 156,000     |  
|Additional paid-in capital                                                                                 |  |              | 85,292,000  |      |   | 82,456,000  |  
|Other                                                                                                      |  |              | 84,000      |      |   | 96,000      |  
|Accumulated deficit                                                                                        |  |              | (53,710,000 | )    |   | (69,883,000 | )
|Total shareholders equity                                                                                 |  |              | 31,826,000  |      |   | 12,825,000  |  
|Total liabilities and shareholders equity                                                                 |  | $            | 44,180,000  |      | $ | 31,278,000  |  

See accompanying notes.

44

---



Vascular Solutions, Inc.

Consolidated Statements of Operations

|                                                                     |  |                        |            |      |   |            |   |   |            |  
|-------------------------------------------------------------------- |  | ---------------------- | ---------- | ---- | - | ---------- | - | - | ---------- | -
|                                                                     |  | Year Ended December 31 |           
|                                                                     |  | 2008                   |            | 2007 |   | 2006       |  
|                                                                     |  |                        |            |      |   |            |   |   |            |  
|Revenue:                                                             |  |                        |            |      |   |            |   |   |            |  
|Product revenue                                                      |  | $                      | 59,757,000 |      | $ | 51,414,000 |   | $ | 43,310,000 |  
|License and collaboration revenue                                    |  |                        | 1,464,000  |      |   | 1,450,000  |   |   |           |  
|Total revenue                                                        |  |                        | 61,221,000 |      |   | 52,864,000 |   |   | 43,310,000 |  
|                                                                     |  |                        |            |      |   |            |   |   |            |  
|Product costs and operating expenses:                                |  |                        |            |      |   |            |   |   |            |  
|Cost of goods sold                                                   |  |                        | 20,690,000 |      |   | 17,002,000 |   |   | 14,231,000 |  
|Cost of goods sold related to thrombin
 inventory                    |  |                        | 670,000    |      |   |           |   |   |           |  
|Collaboration expenses                                               |  |                        | 632,000    |      |   | 685,000    |   |   |           |  
|Research and development                                             |  |                        | 6,333,000  |      |   | 5,481,000  |   |   | 4,578,000  |  
|Clinical and regulatory                                              |  |                        | 3,220,000  |      |   | 3,168,000  |   |   | 2,493,000  |  
|Sales and marketing                                                  |  |                        | 20,482,000 |      |   | 19,603,000 |   |   | 17,097,000 |  
|General and administrative                                           |  |                        | 4,695,000  |      |   | 5,304,000  |   |   | 3,716,000  |  
|Litigation                                                           |  |                        | 1,484,000  |      |   | 5,800,000  |   |   |           |  
|Thrombin qualification                                               |  |                        |           |      |   | 147,000    |   |   | 2,802,000  |  
|Amortization of purchased technology                                 |  |                        |           |      |   |           |   |   | 72,000     |  
|Total product costs and operating expenses                           |  |                        | 58,206,000 |      |   | 57,190,000 |   |   | 44,989,000 |  
|                                                                     |  |                        |            |      |   |            |   |   |            |  
|Operating income (loss)                                              |  |                        | 3,015,000  |      |   | (4,326,000 | ) |   | (1,679,000 | )
|                                                                     |  |                        |            |      |   |            |   |   |            |  
|Other income (expenses):                                             |  |                        |            |      |   |            |   |   |            |  
|Interest income                                                      |  |                        | 203,000    |      |   | 444,000    |   |   | 99,000     |  
|Interest expense                                                     |  |                        | (62,000    | )    |   | (148,000   | ) |   | (206,000   | )
|Foreign exchange loss                                                |  |                        | (28,000    | )    |   |           |   |   |           |  
|                                                                     |  |                        |            |      |   |            |   |   |            |  
|Income (loss) before income taxes                                    |  |                        | 3,128,000  |      |   | (4,030,000 | ) |   | (1,786,000 | )
|                                                                     |  |                        |            |      |   |            |   |   |            |  
|Income tax benefit (expense)                                         |  |                        | 13,045,000 |      |   | (276,000   | ) |   |           |  
|Net income (loss)                                                    |  | $                      | 16,173,000 |      | $ | (4,306,000 | ) | $ | (1,786,000 | )
|                                                                     |  |                        |            |      |   |            |   |   |            |  
|Basic net income (loss) per common share                             |  | $                      | 1.04       |      | $ | (0.28      | ) | $ | (0.12      | )
|Diluted net income (loss) per common share                           |  | $                      | 1.01       |      | $ | (0.28      | ) | $ | (0.12      | )
|Shares used in computing basic net income
 (loss) per common share   |  |                        | 15,588,135 |      |   | 15,237,836 |   |   | 14,910,135 |  
|Shares used in computing diluted net income
 (loss) per common share |  |                        | 15,954,631 |      |   | 15,237,836 |   |   | 14,910,135 |  

See accompanying notes.

45

---



Vascular Solutions, Inc.

Consolidated Statements of Changes in
Shareholders Equity

|                                                                   |  |              |            |                              |   |         |       |                      |            |       |   |         |   |   |             |   |   |            |  
|------------------------------------------------------------------ |  | ------------ | ---------- | ---------------------------- | - | ------- | ----- | -------------------- | ---------- | ----- | - | ------- | - | - | ----------- | - | - | ---------- | -
|                                                                   |  | Common Stock |            | Additional
 Paid-In
 Capital |   |         |       | Accumulated
 Deficit |            |       |  
|                                                                   |  | Shares       |            | Amount                       |   |         | Other |                      |            | Total |  
|Balance at December 31, 2005                                       |  |              | 14,642,225 |                              | $ | 147,000 |       | $                    | 77,793,000 |       | $ | (42,000 | ) | $ | (63,791,000 | ) | $ | 14,107,000 |  
|Exercise of stock options                                          |  |              | 251,722    |                              |   | 2,000   |       |                      | 375,000    |       |   |        |   |   |            |   |   | 377,000    |  
|Issuance of common stock under the Employee Stock
Purchase Plan    |  |              | 88,484     |                              |   | 1,000   |       |                      | 574,000    |       |   |        |   |   |            |   |   | 575,000    |  
|Stock option compensation                                          |  |              | 158,750    |                              |   | 1,000   |       |                      | 1,087,000  |       |   |        |   |   |            |   |   | 1,088,000  |  
|Deferred compensation related to option
grants                     |  |              |           |                              |   |        |       |                      | 12,000     |       |   | (12,000 | ) |   |            |   |   |           |  
|Amortization of deferred compensation                              |  |              |           |                              |   |        |       |                      |           |       |   | 31,000  |   |   |            |   |   | 31,000     |  
|Comprehensive loss:                                                |  |              |            |                              |   |         |       |                      |            |       |   |         |   |   |             |   |   |            |  
|Net loss                                                           |  |              |           |                              |   |        |       |                      |           |       |   |        |   |   | (1,786,000  | ) |   | (1,786,000 | )
|Translation adjustment                                             |  |              |           |                              |   |        |       |                      |           |       |   | 75,000  |   |   |            |   |   | 75,000     |  
|Total comprehensive loss                                           |  |              |            |                              |   |         |       |                      |            |       |   |         |   |   |             |   |   | (1,711,000 | )
|Balance at December 31, 2006                                       |  |              | 15,141,181 |                              |   | 151,000 |       |                      | 79,841,000 |       |   | 52,000  |   |   | (65,577,000 | ) |   | 14,467,000 |  
|Exercise of stock options                                          |  |              | 208,781    |                              |   | 2,000   |       |                      | 473,000    |       |   |        |   |   |            |   |   | 475,000    |  
|Issuance of common stock under the Employee Stock
Purchase Plan    |  |              | 102,194    |                              |   | 1,000   |       |                      | 666,000    |       |   |        |   |   |            |   |   | 667,000    |  
|Stock option compensation                                          |  |              | 154,500    |                              |   | 2,000   |       |                      | 1,455,000  |       |   |        |   |   |            |   |   | 1,457,000  |  
|Deferred compensation related to option
grants                     |  |              |           |                              |   |        |       |                      | 21,000     |       |   | (21,000 | ) |   |            |   |   |           |  
|Amortization of deferred compensation                              |  |              |           |                              |   |        |       |                      |           |       |   | 26,000  |   |   |            |   |   | 26,000     |  
|Comprehensive loss:                                                |  |              |            |                              |   |         |       |                      |            |       |   |         |   |   |             |   |   |            |  
|Net loss                                                           |  |              |           |                              |   |        |       |                      |           |       |   |        |   |   | (4,306,000  | ) |   | (4,306,000 | )
|Translation adjustment                                             |  |              |           |                              |   |        |       |                      |           |       |   | 39,000  |   |   |            |   |   | 39,000     |  
|Total comprehensive loss                                           |  |              |            |                              |   |         |       |                      |            |       |   |         |   |   |             |   |   | (4,267,000 | )
|Balance at December 31, 2007                                       |  |              | 15,606,656 |                              |   | 156,000 |       |                      | 82,456,000 |       |   | 96,000  |   |   | (69,883,000 | ) |   | 12,825,000 |  
|Exercise of stock options                                          |  |              | 184,860    |                              |   | 2,000   |       |                      | 617,000    |       |   |        |   |   |            |   |   | 619,000    |  
|Issuance of common stock under the Employee Stock
Purchase Plan    |  |              | 133,274    |                              |   | 1,000   |       |                      | 701,000    |       |   |        |   |   |            |   |   | 702,000    |  
|Stock option compensation                                          |  |              | 130,000    |                              |   | 1,000   |       |                      | 1,676,000  |       |   |        |   |   |            |   |   | 1,677,000  |  
|Cancellation of common stock upon the vesting of
restricted shares |  |              | (27,271    | )                            |   |        |       |                      | (158,000   | )     |   |        |   |   |            |   |   | (158,000   | )
|Amortization of deferred compensation                              |  |              |           |                              |   |        |       |                      |           |       |   | 9,000   |   |   |            |   |   | 9,000      |  
|Comprehensive income:                                              |  |              |            |                              |   |         |       |                      |            |       |   |         |   |   |             |   |   |            |  
|Net income                                                         |  |              |           |                              |   |        |       |                      |           |       |   |        |   |   | 16,173,000  |   |   | 16,173,000 |  
|Translation adjustment                                             |  |              |           |                              |   |        |       |                      |           |       |   | (21,000 | ) |   |            |   |   | (21,000    | )
|Total comprehensive income                                         |  |              |            |                              |   |         |       |                      |            |       |   |         |   |   |             |   |   | 16,152,000 |  
|Balance at December 31, 2008                                       |  |              | 16,027,519 |                              | $ | 160,000 |       | $                    | 85,292,000 |       | $ | 84,000  |   | $ | (53,710,000 | ) | $ | 31,826,000 |  

See accompanying notes.

46

---



Vascular Solutions, Inc.

Consolidated Statements of Cash Flows

|                                                                                      |  |                        |             |      |   |            |   |   |            |  
|------------------------------------------------------------------------------------- |  | ---------------------- | ----------- | ---- | - | ---------- | - | - | ---------- | -
|                                                                                      |  | Year Ended December 31 |            
|                                                                                      |  | 2008                   |             | 2007 |   | 2006       |  
|Operating activities                                                                  |  |                        |             |      |   |            |   |   |            |  
|Net income (loss)                                                                     |  | $                      | 16,173,000  |      | $ | (4,306,000 | ) | $ | (1,786,000 | )
|Adjustments to reconcile net income (loss)
 to net cash used in operating activities: |  |                        |             |      |   |            |   |   |            |  
|Depreciation                                                                          |  |                        | 1,469,000   |      |   | 1,376,000  |   |   | 994,000    |  
|Amortization                                                                          |  |                        |            |      |   |           |   |   | 72,000     |  
|Stock-based compensation                                                              |  |                        | 1,677,000   |      |   | 1,457,000  |   |   | 1,088,000  |  
|Deferred compensation expense                                                         |  |                        | 9,000       |      |   | 26,000     |   |   | 31,000     |  
|Deferred taxes, net                                                                   |  |                        | (13,194,000 | )    |   | 28,000     |   |   |           |  
|Loss on disposal of fixed assets                                                      |  |                        | 26,000      |      |   |           |   |   |           |  
|Change in accounts receivable allowance                                               |  |                        | (10,000     | )    |   | 20,000     |   |   | (30,000    | )
|Changes in operating assets and
 liabilities:                                         |  |                        |             |      |   |            |   |   |            |  
|Accounts receivable                                                                   |  |                        | (1,330,000  | )    |   | (848,000   | ) |   | (1,626,000 | )
|Inventories                                                                           |  |                        | (1,667,000  | )    |   | (1,080,000 | ) |   | (234,000   | )
|Prepaid expenses                                                                      |  |                        | (235,000    | )    |   | (14,000    | ) |   | (212,000   | )
|Accounts payable                                                                      |  |                        | 1,000       |      |   | 758,000    |   |   | (1,638,000 | )
|Accrued compensation and expenses                                                     |  |                        | (5,091,000  | )    |   | 5,524,000  |   |   | 581,000    |  
|Deferred license fees received                                                        |  |                        | 731,000     |      |   | 7,000,000  |   |   |           |  
|Amortization of deferred license fees and
 other deferred revenue                     |  |                        | (845,000    | )    |   | (562,000   | ) |   |           |  
|Net cash provided by (used in) operating
 activities                                  |  |                        | (2,286,000  | )    |   | 9,379,000  |   |   | (2,760,000 | )
|                                                                                      |  |                        |             |      |   |            |   |   |            |  
|Investing activities                                                                  |  |                        |             |      |   |            |   |   |            |  
|Purchase of property and equipment, net                                               |  |                        | (1,536,000  | )    |   | (1,545,000 | ) |   | (1,704,000 | )
|Cash deposits transferred from (to)
 restricted cash                                  |  |                        | 5,473,000   |      |   | (5,473,000 | ) |   |           |  
|Net cash provided by (used in) investing
 activities                                  |  |                        | 3,937,000   |      |   | (7,018,000 | ) |   | (1,704,000 | )
|                                                                                      |  |                        |             |      |   |            |   |   |            |  
|Financing activities                                                                  |  |                        |             |      |   |            |   |   |            |  
|Net proceeds from the exercise of stock
 options and stock warrants                   |  |                        | 619,000     |      |   | 475,000    |   |   | 377,000    |  
|Net proceeds from the sale of common stock,
 employee stock purchase plan             |  |                        | 702,000     |      |   | 667,000    |   |   | 575,000    |  
|Proceeds from borrowings on long-term debt                                            |  |                        |            |      |   |           |   |   | 2,000,000  |  
|Payments on long-term debt borrowings                                                 |  |                        | (867,000    | )    |   | (800,000   | ) |   | (333,000   | )
|Repurchase of common shares                                                           |  |                        | (158,000    | )    |   |           |   |   |           |  
|Net cash provided by financing activities                                             |  |                        | 296,000     |      |   | 342,000    |   |   | 2,619,000  |  
|Effect of exchange rate changes on cash and
 cash equivalents                         |  |                        | (24,000     | )    |   | 26,000     |   |   | 120,000    |  
|Increase (decrease) in cash and cash
 equivalents                                     |  |                        | 1,923,000   |      |   | 2,729,000  |   |   | (1,725,000 | )
|Cash and cash equivalents at beginning of
 year                                       |  |                        | 5,286,000   |      |   | 2,557,000  |   |   | 4,282,000  |  
|Cash and cash equivalents at end of year                                              |  | $                      | 7,209,000   |      | $ | 5,286,000  |   | $ | 2,557,000  |  
|Supplemental disclosure of cash flow                                                  |  |                        |             |      |   |            |   |   |            |  
|Cash paid for interest                                                                |  | $                      | 68,000      |      | $ | 155,000    |   | $ | 192,000    |  
|Cash paid for taxes                                                                   |  | $                      | 252,000     |      | $ | 149,000    |   | $ |           |  

See accompanying notes.

47

---



1. Description of Business

Vascular
Solutions, Inc. (the Company) is a medical device company focused on bringing
clinically advanced solutions to interventional cardiologists and interventional
radiologists. The Companys main
product lines consist of the following:

| |   |                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Hemostatic (blood clotting) products,
principally consisting of the D-Stat Dry hemostat, a topical thrombin-based
pad with a bandage used to control surface bleeding, and the D-Stat®Flowable, a thick yet flowable thrombin-based mixture for preventing bleeding
in subcutaneous pockets,
| |   |                                                                                                                                                                                                                                                                                              
| |  | Extraction catheters, principally
consisting of the Pronto® V3 extraction catheter, a mechanical
system for the removal of soft thrombus from arteries,                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                              
| |  | Vein products, principally consisting of
the Vari-Lase® endovenous laser, a laser and procedure kit used
for the treatment of varicose veins,                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                                              
| |  | Specialty catheters, consisting of a
variety of catheters for clinical niches including the Langston®dual lumen catheters, Twin-Pass® dual access catheters, Gandras
catheters and Gopher support catheters, and                                                                           
| |   |                                                                                                                                                                                                                                                                                              
| |  | Access products, principally consisting of
micro-introducer kits, the Micro Elite snare, the Expro Elite snare , the
Guardian® hemostatis valve, and guidewires used in connection with
percutaneous access to the vasculature.                                                            

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

2. Summary of Significant Accounting Policies

Basis of Consolidation

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

Segment Reporting

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

48

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2. Summary of Significant Accounting Policies
(Continued)

Our primary
products are categorized into five product lines. The following table sets forth, for the periods indicated, net
revenue by product line along with the percent change from the previous
year:

|                         |  |                              |            |      |                 |      |             |    |    |                 |            |             |  |  |                 |     |   |   |            |  |  |  |  |     |  
|------------------------ |  | ---------------------------- | ---------- | ---- | --------------- | ---- | ----------- | -- | -- | --------------- | ---------- | ----------- |  |  | --------------- | --- | - | - | ---------- |  |  |  |  | --- | -
|                         |  | For Years Ended December 31, |           
|                         |  | 2008                         |            | 2007 |                 | 2006 |            
|                         |  | Net Revenue                  |            |      | Percent
 Change |      | Net Revenue |    |    | Percent
 Change |            | Net Revenue |  |  | Percent
 Change |    
|                         |  |                              |            |      |                 |      |             |    |    |                 |            |             |  |  |                 |     |   |   |            |  |  |  |  |     |  
|Hemostat products        |  | $                            | 23,475,000 |      |                 |      |             | (5 | %) | $               | 24,712,000 |             |  |  |                 | 14  | % | $ | 21,709,000 |  |  |  |  | 9   | %
|Extraction catheters     |  |                              | 14,992,000 |      |                 |      |             | 36 | %  |                 | 11,016,000 |             |  |  |                 | 22  | % |   | 9,058,000  |  |  |  |  | 42  | %
|Vein products            |  |                              | 10,035,000 |      |                 |      |             | 16 | %  |                 | 8,629,000  |             |  |  |                 | 22  | % |   | 7,049,000  |  |  |  |  | 62  | %
|Specialty catheters      |  |                              | 4,563,000  |      |                 |      |             | 36 | %  |                 | 3,363,000  |             |  |  |                 | 8   | % |   | 3,126,000  |  |  |  |  | 202 | %
|Access products          |  |                              | 5,561,000  |      |                 |      |             | 99 | %  |                 | 2,790,000  |             |  |  |                 | 74  | % |   | 1,604,000  |  |  |  |  | 140 | %
|Other products           |  |                              | 1,131,000  |      |                 |      |             | 25 | %  |                 | 904,000    |             |  |  |                 | 18  | % |   | 764,000    |  |  |  |  | 40  | %
|License &
 Collaboration |  |                              | 1,464,000  |      |                 |      |             | 1  | %  |                 | 1,450,000  |             |  |  |                 | N/A |   |   |           |  |  |  |  |    |  
|                        
|Total Net Revenue        |  | $                            | 61,221,000 |      |                 |      |             | 16 | %  | $               | 52,864,000 |             |  |  |                 | 22  | % | $ | 43,310,000 |  |  |  |  | 32  | %

Foreign Currency Translation and Transactions

The Companys
German subsidiary Vascular Solutions, GmbH accounted for its transactions in
its functional currency, the Euro.
Foreign assets and liabilities are translated into United States dollars
using the year-end exchange rates.
Equity is translated at average historical exchange rates. Results of operations are translated using
the average exchange rates throughout the year. Translation gains or losses are accumulated as a separate
component of shareholders equity.

Effective
April 1, 2008 the Company began to sell products to a new international
distributor in Germany at prices denominated in Euros. The Company also purchases a small number of
inventory items at prices denominated in Euros. As a result, the Company is exposed to foreign exchange movements
during the time between the shipment of the product and payment. The Company currently has terms of net 60
days with this distributor and net 30 days with vendors under the agreements
providing for payments in Euros.

Comprehensive Loss

The components
of comprehensive income (loss) are net income (loss) and the effects of foreign
currency translation adjustments. The
accumulated other comprehensive income (loss) for the foreign currency
translation adjustment at December 31, 2008 and 2007 was $84,000 and $105,000,
respectively.

Fair Value of Financial Instruments

The carrying
amount for cash and cash equivalents, accounts receivable, accounts payable,
and accrued expenses approximates fair value due to the immediate or short-term
maturity of these financial instruments.
The fair value of long-term debt approximated their carrying value because
the terms are equivalent to borrowing rates currently available to the Company
for debt with similar terms and maturities.

49

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2. Summary of Significant Accounting Policies
(Continued)

Use of Estimates

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

Cash and Cash Equivalents

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

Restricted Cash

Under an
investment management agreement with Wells Fargo Bank, N.A., effective June 19,
2007, the Company set aside $5,473,000 as restricted cash in connection with
the judgment in the Diomed, Inc. litigation case as more fully discussed below
in Note 14, Commitments and Contingencies.
Upon settlement of the lawsuit on April 8, 2008, a portion of the
restricted cash was paid to the bankruptcy estate of Diomed and the remaining
restricted cash was returned to the Company on June 10, 2008 and the account
was closed.

Credit Risk and Allowance for Doubtful
Accounts

The Company
maintains allowances for doubtful accounts for estimated losses resulting from
the inability of its customers to make required payments. This allowance is regularly evaluated by the
Company for adequacy by taking into consideration factors such as past
experience, credit quality of the customer base, age of the receivable
balances, both individually and in the aggregate, and current economic
conditions that may affect a customers ability to pay. Accounts receivable over 60 days past due
are considered past due. The Company
does not accrue interest on past due accounts receivable. Receivables are written off only after all
collection attempts have failed and are based on individual credit evaluation
and the specific circumstances of the customer. At December 31, 2008 and 2007, the allowance for doubtful
accounts was $95,000 and $90,000, respectively.

All product
returns must be pre-approved and, if approved, customers are subject to a 20%
restocking charge. The Company analyzes
the rate of historical returns when evaluating the adequacy of the allowance
for sales returns, which is included with the allowance for doubtful accounts
on its balance sheet. At December 31,
2008 and 2007, the sales and return allowance was $25,000 and $40,000,
respectively.

Accounts
receivable are shown net of the combined total of the allowance for doubtful
accounts and allowance for sales returns of $120,000 and $130,000 at December
31, 2008 and 2007, respectively.

50

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2. Summary of Significant Accounting Policies
(Continued)

Inventories

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

|                |  |      |           |      |   |           | 
|--------------- |  | ---- | --------- | ---- | - | --------- | 
|                |  | 2008 |           | 2007 |  
|Raw
 materials  |  | $    | 4,943,000 |      | $ | 4,119,000 | 
|Work-in-process |  |      | 871,000   |      |   | 650,000   | 
|Finished
 goods |  |      | 4,160,000 |      |   | 3,538,000 | 
|                |  | $    | 9,974,000 |      | $ | 8,307,000 | 

Cost of sales related to
thrombin inventory expenses were $670,000 for the year ended December 31, 2008.
Cost of sales related to thrombin inventory expenses relate to a reserve the
Company has recorded for the amount of thrombin the Company anticipates will
expire prior to being used in the manufacturing of international hemostat
products. The Company does not anticipate incurring additional charges related
to thrombin inventory during 2009.

Property and Equipment

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

|                                    |  |                                                        
|----------------------------------- |  | -------------------------------------------------------
|Manufacturing
 equipment            |  | 1 to 8 years                                           
|Office and
 computer equipment      |  | 1 to 5 years                                           
|Furniture
 and fixtures             |  | 3 to 8 years                                           
|Leasehold
 improvements             |  | Shorter of
 useful life or
 remaining term of the lease
|Research and
 development equipment |  | 3 to 7 years                                           

Impairment of Long-Lived Assets

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

Revenue Recognition

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

51

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2. Summary of Significant Accounting Policies
(Continued)

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

The Companys revenues from
license agreements and research collaborations are recognized when earned (see
Note 14). In accordance with Emerging Issues Task Force (EITF) Issue No. 00-21,
Revenue
Arrangements with Multiple Deliverables, for deliverables which
contain multiple deliverables, the Company separates the deliverables into
separate accounting units if they meet the following criteria: (i) the delivered
items have a stand-alone value to the customer; (ii) the fair value of any
undelivered items can be reliably determined; and (iii) if the arrangement
includes a general right of return, delivery of the undelivered items is
probable and substantially controlled by the seller. Deliverables that do not
meet these criteria are combined with one or more other deliverables into one
accounting unit. Revenue from each accounting unit is recognized based on the
applicable accounting literature, primarily Staff Accounting Bulletin (SAB)
104, Revenue
Recognition.

The Company currently has a
license agreement with King Pharmaceuticals, Inc. (King) under which the
Company licensed the exclusive rights of Thrombi-PadTM, Thrombi-Gel®
and Thrombi-PasteTM products to King in exchange for a license fee.
The Company is amortizing the license fees on a straight-line basis over the
projected 10 year economic life of the products. The Company determines the
economic life of the products under its license agreements by evaluating
similar products the Company has launched or other similar products in the
medical industry. In addition, the Company has a five-year license agreement
with Nicolai, GmbH in which the Company is amortizing the license fee on a
straight-line basis over the five-year life of the agreement.

As part of the agreements
with King, the Company agreed to conduct clinical studies for the Thrombi-Gel
and Thrombi-Paste products, with the costs related to the clinical studies paid
by King. Additionally, on May 18, 2007, the Company entered into a Product
Development & Supply Agreement with a third party company pursuant to which
the Company agreed to develop, manufacture and sell to this company a specialty
version of its Twin-Pass dual access catheter, with the costs related to the
development paid by this company. The Company will recognize the collaboration
revenue on these development agreements as it is earned in accordance with
Emerging Issues Task Force 01-14, Income Statement Characterizations of Reimbursements
Received for Out-of-Pocket Expenses Incurred and SAB104

In addition, the Company has
reviewed the provisions of EITF Issue No. 07-01, Accounting for Collaborative
Arrangements,and believes the adoption of this EITF will have no
impact on the amounts recorded under these agreements.

Shipping and Handling Costs

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

52

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2. Summary of Significant Accounting Policies
(Continued)

Research and Development Costs

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

Warranty Costs

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

Warranty
provisions and claims for the years ended December 31, 2008, 2007 and 2006,
were as follows:

|                     |  |      |         |      |   |         |   |   |         |  
|-------------------- |  | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                     |  | 2008 |         | 2007 |   | 2006    |  
|Beginning
 balance   |  | $    | 34,000  |      | $ | 46,000  |   | $ | 50,000  |  
|Warranty
 provisions |  |      | 66,000  |      |   | 28,000  |   |   | 19,000  |  
|Warranty
 claims     |  |      | (51,000 | )    |   | (40,000 | ) |   | (23,000 | )
|Ending
 balance      |  | $    | 49,000  |      | $ | 34,000  |   | $ | 46,000  |  

Advertising
Costs

The Company
follows the policy of charging production costs of advertising to expense as
incurred. Advertising expense was $110,000 , $77,000, and $50,000 for the years
ended December 31, 2008, 2007 and 2006, respectively.

Stock-Based Compensation

The Company
has various types of stock-based compensation plans. These plans are
administered by the compensation committee of the Board of Directors, which
selects persons to receive awards and determines the number of shares subject
to each award and the terms, conditions, performance measures and other
provisions of the award. Refer to Notes 8, 9 and 10 for additional information
related to these stock-based compensation plans.

Effective
January 1, 2006, the Company adopted Statement No. 123R, Share-Based Payment (SFAS 123R), which
requires companies to measure and recognize compensation expense for all
stock-based payments at fair value. SFAS 123R is being applied on the
modified prospective basis. Prior to the adoption of SFAS 123R, the Company accounted
for its stock-based compensation plans under the recognition and measurement
principles of Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations, and
accordingly, recognized no compensation expense related to the stock-based
plans.

Under the
modified prospective approach, SFAS 123R applies to new awards and to awards
that were outstanding on January 1, 2006 that are subsequently modified,
repurchased, cancelled or vest. Under the modified prospective approach,
compensation cost recognized in 2006 includes compensation cost for all
share-based payments granted prior to, but not yet vested on, January 1, 2006,
based on the grant-date fair value estimated in accordance with the provisions
of SFAS 123R, and compensation cost for all shared-based payments granted subsequent to
January 1, 2006, based on the grant-date fair value estimated in accordance
with the provisions of SFAS 123R. Prior periods were not restated to reflect
the impact of adopting the new standard.

53

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2. Summary of Significant Accounting Policies
(Continued)

The following
amounts have been recognized as stock-based compensation expense in the
Consolidated Statements of Operations:

|                                       |  |      |           |      |   |           |  |   |           | 
|-------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | --------- | 
|                                       |  | 2008 |           | 2007 |   | 2006      | 
|Stock-based
 compensation included in: |  |      |           |      |   |           |  |   |           | 
|Cost of
 goods sold                    |  | $    | 207,000   |      | $ | 154,000   |  | $ | 122,000   | 
|Research and
 development              |  |      | 170,000   |      |   | 164,000   |  |   | 174,000   | 
|Clinical and
 regulatory               |  |      | 132,000   |      |   | 102,000   |  |   | 89,000    | 
|Sales and
 marketing                   |  |      | 601,000   |      |   | 422,000   |  |   | 362,000   | 
|General and
 administrative            |  |      | 567,000   |      |   | 615,000   |  |   | 341,000   | 
|                                       |  | $    | 1,677,000 |      | $ | 1,457,000 |  | $ | 1,088,000 | 

The Company
uses the Black-Scholes option-pricing model to estimate fair value of
stock-based awards with the following weighted average assumptions:

|                              |  |      |       |      |  |       |  |  |       | 
|----------------------------- |  | ---- | ----- | ---- |  | ----- |  |  | ----- | 
|                              |  | 2008 |       | 2007 |  | 2006  | 
|Stock Options and Awards:     |  |      |       |      |  |       |  |  |       | 
|Expected
 life (years)        |  |      | 5.50  |      |  | 5.50  |  |  | 5.50  | 
|Expected
 volatility          |  |      | 50%   |      |  | 51%   |  |  | 41%   | 
|Dividend
 yield               |  |      | 0%    |      |  | 0%    |  |  | 0%    | 
|Risk-free
 interest rate      |  |      | 2.75% |      |  | 4.64% |  |  | 4.62% | 
|                              |  |      |       |      |  |       |  |  |       | 
|Employee Stock Purchase Plan: |  |      |       |      |  |       |  |  |       | 
|Expected
 life (years)        |  |      | 2.0   |      |  | 2.0   |  |  | 2.0   | 
|Expected
 volatility          |  |      | 42%   |      |  | 36%   |  |  | 36%   | 
|Dividend
 yield               |  |      | 0%    |      |  | 0%    |  |  | 0%    | 
|Risk-free
 interest rate      |  |      | 2.04% |      |  | 3.48% |  |  | 4.75% | 

Restricted
stock awards fair value is calculated as the market price on the date of grant
for the years ended December 31, 2008 and 2007 and the fair value is amortized
on a straight line basis over the requisite service period of four years for
the award. The
weighted average fair value of restricted stock awards granted during 2008,
2007 and 2006 was $6.09, $10.37 and $5.42, respectively.

The weighted
average fair value of stock options granted with an exercise price equal to the
deemed stock price on the date of grant during 2008, 2007 and 2006 was $2.82,
$4.51 and $5.42, respectively.

The Company
calculates expected volatility for stock options and awards using historical
volatility. The starting point for the historical period used is based on a
material change in the Companys operations that occurred in the third quarter
of 2003. The Company uses a 10% forfeiture rate for key employees and a 15%
forfeiture rate for non-key employees for stock options and awards. The Company
calculates expected volatility for employee stock purchase plan shares using
historical volatility over a two-year period. A two-year period is used to
coincide with the maximum two-year offering period under the employee stock
purchase plan.

The risk-free
rates for the expected terms of the stock options and awards and the employee
stock purchase plan is based on the U.S. Treasury yield curve in effect at the
time of grant.

54

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2. Summary of Significant Accounting Policies
(Continued)

Income Taxes

Income taxes
are accounted for under the liability method. Deferred income taxes are
provided for temporary differences between the financial reporting and the tax
bases of assets and liabilities. Deferred tax assets are reduced by a valuation
allowance to the extent that realization of the related deferred tax asset is
not assured. If the Company determines in the future that it is more likely
than not that the Company will realize all or a portion of the deferred tax
assets, the Company will adjust the valuation allowance in the period the
determination is made (Note 7).

When tax
returns are filed, it is highly certain that some positions taken would be
sustained upon examination by the taxing authorities, while others are subject
to uncertainty about the merits of the position taken or the amount of the position
that would be ultimately sustained. The benefit of a tax position is recognized
in the financial statements in the period during which, based on all available
evidence, management believes it is more likely than not that the position will
be sustained upon examination, including the resolution of appeals or
litigation processes, if any. Tax positions taken are not offset or aggregated
with other positions. Tax positions that meet the more-likely-than-not
recognition threshold are measured as the largest amount of tax benefit that is
more than 50 percent likely of being realized upon settlement with the
applicable taxing authority. The portion of the benefits associated with tax
positions taken that exceeds the amount measured as described above is reflected
as a liability for unrecognized tax benefits in the accompanying balance sheet
along with any associated interest and penalties that would be payable to the
taxing authorities upon examination.

In July 2006, the
Financial Accounting Standards Board (FASB) issued FASB Interpretation 48 (FIN
48), Accounting
for Uncertainty in Income Taxes  an Interpretation of FASB Statement
No. 109, which clarifies the accounting for uncertain
income tax positions. This interpretation prescribes a financial statement
recognition threshold and measurement attribute for any tax position taken or
expected to be taken in a tax return. The interpretation also provides guidance
on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. Effective January 1, 2007, the Company
adopted FIN 48. Upon adoption, the Company had $425,000 of unrecognized
income tax benefits and the adoption of FIN 48 had no effect on shareholders
equity. The Company has recorded FIN 48 reserves of $597,000 and $512,000 at
December 31, 2008 and 2007. The impact of tax related interest and penalties is
recorded as a component of income tax expense. At December 31, 2008, the
Company has recorded $-0- for the payment of tax related interest and there
were no tax penalties or interest recognized in the statements of operations

Net Income (Loss) Per Common Share

In accordance
with SFAS No. 128, Earnings Per Share, basic net income
(loss) per common share is computed by dividing net income (loss) by the
weighted average common shares outstanding during the periods presented.
Diluted net income (loss) per common share is computed by dividing net income
(loss) by the weighted average common and potential dilutive common shares
outstanding computed in accordance with the treasury stock method.

The number of
shares used in earnings per share computations is as follows for the years
ended December 31:

|                                                    |  |      |            |      |  |            |  |  |            | 
|--------------------------------------------------- |  | ---- | ---------- | ---- |  | ---------- |  |  | ---------- | 
|                                                    |  | 2008 |            | 2007 |  | 2006       | 
|Weighted
 average common shares outstandingbasic   |  |      | 15,588,135 |      |  | 15,237,836 |  |  | 14,910,135 | 
|Dilutive
 effect of stock options and warrants      |  |      | 366,496    |      |  |           |  |  |           | 
|Weighted
 average common shares outstandingdiluted |  |      | 15,954,631 |      |  | 15,237,836 |  |  | 14,910,135 | 

55

---



2. Summary of Significant Accounting Policies
(Continued)

The dilutive
effect of stock options and warrants in the above table excludes 448,500,
441,500, and 445,920 of options and warrants for which the exercise price was
higher than the average market price for the years ended December 31, 2008,
2007 and 2006, respectively. In addition, dilutive potential common shares of
1,017,400 and 1,065,716 were excluded from diluted weighted average common
shares outstanding for the year ended December 31, 2007 and 2006, respectively
as they would be anti-dilutive due to the Companys net loss for those years.

Goodwill and Other Intangible Assets

In fiscal
2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets.
Goodwill is tested for impairment annually in the fourth quarter or more frequently
if changes in circumstances or the occurrence of events suggest impairment
exists. The Company has concluded that no impairment of goodwill existed as of
December 31, 2008.

Other
intangible assets consist of purchased technology. Purchased technology was
amortized using the straight-line method over its estimated useful life of four
years. The Company reviewed intangible assets for impairment as changes in
circumstances or the occurrence of events suggested the remaining value was not
recoverable.

Leases and Deferred
Rent

The Company
leases all office space. Leases are accounted for under the provisions of SFAS
No. 13, Accounting for Leases, as amended, which requires that leases be
evaluated and classified as operating or capital leases for financial reporting
purposes. As of December 31, 2008, all of our leases were accounted for as
operating leases. For leases that contain rent escalations, we record the total
rent payable during the lease term, as determined above, on a straight-line
basis over the term of the lease and record the difference between the rents
paid and the straight-line rent as a deferred rent. For any lease incentives we
receive for items such as leasehold improvements, we record a deferred credit
for the amount of the lease incentive and amortize it over the lease term,
which may or may not equal the amortization period of the leasehold
improvements in accordance with FASB Technical Bulletin 88-1 Issues Relating
to Accounting for Leases.

3. Goodwill and Other Intangible Assets

The Company
has adopted SFAS No. 141 and determined that the developed technology the
Company acquired from Angiosonics, Inc. in April 2002 would be amortized over
its useful life of four years. The goodwill acquired will not be amortized. In
April 2006, the Company completed the amortization of the purchased technology.
Amortization expense of purchased technology was $-0-, $-0- and $72,000 for the
years ended December 31, 2008, 2007 and 2006, respectively.

Balances of
acquired intangible assets as of December 31, 2008 and 2007 were as follows:

|                             |  |                  |           |                           |   |         |  |   |         | 
|---------------------------- |  | ---------------- | --------- | ------------------------- | - | ------- |  | - | ------- | 
|                             |  | Carrying
 Amount |           | Accumulated
 Amortization |   | Net     | 
|Amortizing
 intangibles:     |  |                  |           |                           |   |         |  |   |         | 
|Purchased technology         |  | $                | 870,000   |                           | $ | 870,000 |  | $ |        | 
|                             |  |                  |           |                           |   |         |  |   |         | 
|Non-amortizing
 intangibles: |  |                  |           |                           |   |         |  |   |         | 
|Goodwill                     |  |                  | 193,000   |                           |   |        |  |   | 193,000 | 
|                             |  | $                | 1,063,000 |                           | $ | 870,000 |  | $ | 193,000 | 

56

---



4. Property and Equipment

Property and
equipment consists of the following at December 31:

|                                                |  |      |            |      |   |            |  
|----------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | -
|                                                |  | 2008 |            | 2007 |  
|Property and
 equipment:                        |  |      |            |      |   |            |  
|Manufacturing equipment                         |  | $    | 5,067,000  |      | $ | 4,481,000  |  
|Office and computer equipment                   |  |      | 1,815,000  |      |   | 1,626,000  |  
|Furniture and fixtures                          |  |      | 463,000    |      |   | 335,000    |  
|Leasehold improvements                          |  |      | 1,275,000  |      |   | 839,000    |  
|Research and development equipment              |  |      | 436,000    |      |   | 380,000    |  
|Construction-in-process                         |  |      | 213,000    |      |   | 405,000    |  
|                                                |  |      | 9,269,000  |      |   | 8,066,000  |  
|Less
 accumulated depreciation and amortization |  |      | (5,382,000 | )    |   | (4,220,000 | )
|Net property
 and equipment                     |  | $    | 3,887,000  |      | $ | 3,846,000  |  

5. Lines of Credit

On December
26, 2007, the Company modified and extended its secured asset-based loan and
security agreement with Silicon Valley Bank dated December 31, 2003 (as
previously amended December 28, 2006 and December 29, 2005), consisting of an
operating line of credit and an equipment line of credit. The operating line of
credit is a two-year, $10,000,000 facility with availability based primarily on
eligible customer receivables and inventory. The interest rate is the greater
of prime plus 0.5% or 7.25%. As of December 31, 2008, the Company had no
outstanding balance against the operating line of credit. Based on the
Companys eligible customer receivables, inventory and cash balances,
$10,000,000 was available for borrowing as of December 31, 2008. The operating
line of credit requires an annual fee of 0.25% of the average unused portion of
the committed revolving line as determined by the bank and reviewed by
management.

The equipment
line of credit was paid in full on July 9, 2008 and the Company no longer has
the ability to borrow any additional funds under the equipment line of credit
portion of the credit facility.

The credit
facility includes three covenants: a minimum of $10,000,000 in tangible net
worth, a minimum of $3,000,000 of unrestricted cash in deposit accounts with
Silicon Valley Bank and an adjusted net income for each financial reporting
period. The adjusted net income covenant requires an adjusted net income
greater than $500,000 for each rolling three month period for the remaining
term of the agreement. The amount required as a minimum tangible net worth will
increase by an amount equal to the sum of 50% of the Companys quarterly net
profit and all consideration received by the Company upon the issuance of
equity securities. The minimum tangible net worth requirement at December 31,
2008 was $19,642,000. The Company was in compliance with all of the covenants
as of December 31, 2008.

6. Leases

The Company
leases two buildings totaling approximately 93,000 square-feet under separate
operating leases. On November 12, 2007, both leases were amended to extend the
terms until September 2015, with options to renew both leases. Rent expense
related to the operating leases was approximately $755,000, $596,000 and
$481,000 for the years ended December 31, 2008, 2007, and 2006, respectively.

57

---



6. Leases (Continued)

Future minimum
lease commitments under these operating leases as of December 31, 2008
were as follows:

|           |  |   |           | 
|---------- |  | - | --------- | 
|2009       |  | $ | 749,000   | 
|2010       |  |   | 761,000   | 
|2011       |  |   | 797,000   | 
|2012       |  |   | 809,000   | 
|2013       |  |   | 841,000   | 
|Thereafter |  |   | 1,473,000 | 
|           |  | $ | 5,430,000 | 

7. Income Taxes

At December
31, 2008, the Company had net operating loss carryforwards of approximately
$47,080,000 and $4,911,000 for federal and state income tax purposes that are
available to offset future taxable income and begin to expire in the year 2019.
Included in the U.S. amount are approximately $3.0 million of deductions
resulting from disqualifying dispositions of stock options. When these
deductions from disqualifying dispositions are realized for financial statement
purposes they will not result in a reduction in income tax expense, rather the
benefit will be recorded as additional paid-in-capital. At December 31, 2008,
the Company also had federal research and development tax credit carryforwards
of approximately $3,436,000 and Minnesota research and development tax credit
carryforwards of approximately $838,000, which begin to expire in the year
2012. At December 31, 2008, the Company has foreign tax loss carryforwards of
approximately $1,618,000 that do not expire. The adoption of FIN 48, Accounting for Uncertainty in Income Taxes,has
had no impact on the reported carryforwards at December 31, 2008.

Utilization in
future years of any loss or credit carryforwards may be limited under
Sections 382 and 383 of the Internal Revenue Code if significant ownership
changes have occurred or from future tax legislation changes. The Company
performed a Section 382 study during the third quarter of 2005 on its federal
net operating loss carryforward and the Company concluded that it had no
limitations on the net operating loss carryforward incurred through 2005. The
Company does not believe there has been any significant ownership changes since
the date of this testing, therefore there are no restrictions at this time on
the future use of the Companys net operating loss carryforwards.

The Company
adopted the provisions of FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes - an
Interpretation of SFAS No. 109 on January 1, 2007.
This interpretation prescribes a financial statement recognition threshold and
measurement attribute for any tax position taken or expected to be taken in a
tax return. The interpretation also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. Upon adoption, there was $425,000 of unrecognized income
tax benefits and the adoption of FIN 48 had no effect on
shareholders equity. The impact of tax related interest and penalties will be
recorded as a component of income tax expense. At December 31, 2008, the
Company has accrued zero for the payment of tax related interest and there
was no tax interest or penalties recognized in the statements of operations.

The Company is
subject to income tax examinations in the U.S. Federal jurisdiction, as
well as in the Germany and various state jurisdictions. At December 31, 2008,
the Company was not under examination by any of these taxing authorities and
the open tax years are 2006 to 2008.

58

---



7. Income Taxes (Continued)

A
reconciliation of the beginning and ending amount of unrecognized tax benefit
is as follows:

|                                                                          |  |   |         | 
|------------------------------------------------------------------------- |  | - | ------- | 
|Balance at
 December 31, 2006                                             |  | $ | 425,000 | 
|Increases as a result of tax positions
 taken during a prior period       |  |   | 1,000   | 
|Increases as a result of tax positions
 taken during the current period   |  |   | 86,000  | 
|Reductions as a result of lapse of the
 applicable statute of limitations |  |   |        | 
|Decreases relating to settlements with
 taxing authorities                |  |   |        | 
|Balance at
 December 31, 2007                                             |  |   | 512,000 | 
|Increases as a result of tax positions
 taken during a prior period       |  |   | 5,000   | 
|Increases as a result of tax positions
 taken during the current period   |  |   | 80,000  | 
|Reductions as a result of lapse of the
 applicable statute of limitations |  |   |        | 
|Decreases relating to settlements with
 taxing authorities                |  |   |        | 
|Balance at
 December 31, 2008                                             |  | $ | 597,000 | 

The components
of the Companys deferred tax assets and liabilities as of December 31, 2008
and 2007 are as follows:

|                                                                         |  |      |             |      |   |             |  
|------------------------------------------------------------------------ |  | ---- | ----------- | ---- | - | ----------- | -
|                                                                         |  | 2008 |             | 2007 |  
|Deferred tax
 assets:                                                    |  |      |             |      |   |             |  
|Net operating loss carryforwards                                         |  | $    | 19,538,000  |      | $ | 20,258,000  |  
|Tax credit carryforwards                                                 |  |      | 4,274,000   |      |   | 3,713,000   |  
|Deferred revenue                                                         |  |      | 2,353,000   |      |   | 2,462,000   |  
|Litigation                                                               |  |      |            |      |   | 2,022,000   |  
|Depreciation and amortization                                            |  |      | 206,000     |      |   | 171,000     |  
|Accrued compensation                                                     |  |      | 304,000     |      |   | 299,000     |  
|Stock-based compensation                                                 |  |      | 530,000     |      |   | 312,000     |  
|Federal and state AMT credits                                            |  |      | 195,000     |      |   | 207,000     |  
|Inventory reserve                                                        |  |      | 334,000     |      |   | 66,000      |  
|Other                                                                    |  |      | 138,000     |      |   | 74,000      |  
|Gross
 deferred tax assets                                               |  |      | 27,872,000  |      |   | 29,584,000  |  
|Deferred tax
 liability                                                  |  |      | (34,000     | )    |   | (28,000     | )
|Net deferred
 taxes assets before FIN48 Reserve and valuation allowances |  |      | 27,838,000  |      |   | 29,556,000  |  
|FIN48 Reserve                                                            |  |      | (597,000    | )    |   | (512,000    | )
|Less valuation allowances                                                |  |      | (14,075,000 | )    |   | (29,072,000 | )
|Net deferred
 tax asset / (liability)                                    |  | $    | 13,166,000  |      | $ | (28,000     | )
|                                                                        
|Deferred
 taxes recorded on the balance sheet:                           |  |      |             |      |   |             |  
|Net deferred tax assets / (liabilities) 
 current                       |  | $    | 2,680,000   |      | $ |            |  
|Net deferred tax assets / (liabilities) 
 long-term                     |  |      | 10,486,000  |      |   | (28,000     | )
|Net deferred
 tax assets                                                 |  | $    | 13,166,000  |      | $ | (28,000     | )

59

---



7. Income Taxes (Continued)

The Company regularly assesses
the likelihood that the deferred tax assets will be recovered from future
taxable income. The Company considers projected future taxable income and
ongoing tax planning strategies, then records a valuation allowance to reduce
the carrying value of the net deferred taxes to an amount that is more likely
than not to be realized. Based upon the Companys assessment of all available
evidence, including previous three year cumulative income before unusual and
infrequent expenses (litigation and thrombin qualification expenses), estimates
of future profitability, and the Companys overall prospects of future
business, the Company determined that it is more likely than not that the
Company will be able to realize a portion of the deferred tax
assets in the future, and as a result recorded a $13,200,000 income tax benefit
for the year ended December 31, 2008. To determine the amount of the reduction
in the valuation allowance, the Company used a discounted projection of its
revenue and income over the next five years, which would approximate the
ten-year life of the Companys three most significant products at this time. The amount
of the valuation allowance reduction was based on the Companys projected
discounted taxable income. The Company will continue to assess the potential
realization of deferred tax assets on an annual basis, or an interim basis if
circumstances warrant. If the Companys actual results and updated projections
vary significantly from the projections used as a basis for this determination,
the Company may need to increase or decrease the valuation allowance against
the gross deferred tax assets. The Company would adjust earnings for the
deferred tax in the period the determination was made. At December 31, 2008 and
2007, the valuation allowance was $14,075,000 and $29,072,000, respectively. Of
these amounts, $530,000 as of December 31, 2008 and $191,000 as of December 31,
2007 was attributable to increases in the net operating loss carry forwards
resulting from the exercise of stock options. These amounts will be recorded as
an increase to additional paid-in-capital if it is determined in the future
that this portion of the valuation allowance is no longer required. The
increase (decrease) in the valuation allowance was ($14,997,000), $1,360,000
and $628,000 for the years ended December 31, 2008, 2007 and 2006,
respectively.

Reconciliation
of the statutory federal income tax rate to the Companys effective tax rate is
as follows:

|                                            |  |      |        |      |  |       |    |  |       |   
|------------------------------------------- |  | ---- | ------ | ---- |  | ----- | -- |  | ----- | --
|                                            |  | 2008 |        | 2007 |  | 2006  |   
|                                            |  |      |        |      |  |       |    |  |       |   
|Tax at
 statutory rate                      |  |      | 34.0   | %    |  | (34.0 | )% |  | (34.0 | )%
|Permanent
 differences                      |  |      | 9.6    |      |  | 13.5  |    |  | 7.5   |   
|State income
 taxes, net of federal benefit |  |      | 3.7    |      |  | (3.7  | )  |  | (5.0  | ) 
|Change in
 valuation reserve                |  |      | (476.4 | )    |  | 33.6  |    |  | 35.7  |   
|R&D credits
 generated                      |  |      | (18.1  | )    |  | (24.8 | )  |  | (35.4 | ) 
|FIN48
 reserve                              |  |      | 2.8    |      |  | 12.7  |    |  |      |   
|Change in
 effective deferred tax rate      |  |      | 25.4   |      |  | 4.0   |    |  |      |   
|Other
 adjustments                          |  |      | 2.0    |      |  | 5.5   |    |  | 31.2  |   
|Effective
 income tax rate                  |  |      | (417.0 | )%   |  | 6.8   | %  |  |      | % 
|                                            |  |      |        |      |  |       |    |  |       |   
|                                            |  | 2008 |        | 2007 |  | 2006  |   
|                                            |  |      |        |      |  |       |    |  |       |   
|Current
 taxes                              |  |      | 3.7    | %    |  | (3.7  | )% |  |      | % 
|Deferred
 taxes                             |  |      | 1.3    |      |  | 10.5  |    |  |      |   
|Benefit from
 release of valuation reserve  |  |      | (422.0 | )    |  |      |    |  |      |   
|Effective
 income tax rate                  |  |      | (417.0 | )%   |  | 6.8   | %  |  |      | % 

The income tax
expense for the years ended December 31, 2007 and 2006 principally relates to
federal and state alternative minimum taxes and various state minimum fees.

8. Stock Options and Restricted Shares

Stock Option and Stock Award Plan

The Company
has a stock option and stock award plan (the Stock Option Plan) which provides
for the granting of stock options, restricted shares and stock appreciation
rights to employees, directors, and consultants. Incentive stock options may be
granted only to employees of the Company. Options which do not qualify as
incentive stock options and awards of restricted shares may be granted to both
employees and to non-employee directors and
consultants. As of December 31, 2008, the Company had reserved
5,400,000 shares of common stock under the Stock Option Plan. Under the
Stock Option Plan, stock options must be granted at an exercise price not less
than the fair market value of the Companys common stock on the grant date.
Prior to the initial public offering in July 2000, the Board of Directors
determined the fair value of the Companys common shares underlying options by
assessing the business progress of the Company as well as the market conditions
for medical device companies and other external factors. Vesting requirements
of all awards under this plan are time based and vary by individual grant. The
options expire on the date determined by the Board of Directors but may not
extend more than 10 years from the grant date. The incentive stock options
generally become exercisable over a four-year period and the nonqualified stock
options generally become exercisable over a two-year period. Unexercised
options are canceled 90 days after termination, and unvested awards are
canceled on the date of termination of employment and become available under
the Stock Option Plan for future grants.

60

---



8. Stock Options and Restricted Shares
(Continued)

During 2006 to
2008, the Company granted stock options to its directors under the Stock Option
Plan. The ten-year options issued to the Companys directors vest over a
one-year period based on the continuation of service as a director of the
Company. The Company uses a 0% forfeiture rate for all director options
granted.

Option
activity is summarized as follows:

|                                  |  |                                                                         |           |                           |  |                 |   |                                    |             |                             |   |      |  |   |           | 
|--------------------------------- |  | ----------------------------------------------------------------------- | --------- | ------------------------- |  | --------------- | - | ---------------------------------- | ----------- | --------------------------- | - | ---- |  | - | --------- | 
|                                  |  | Shares
 Available
 for Grant
 (exclusive of
 restricted
 shares issued) |           | Plan Options
 Outstanding |  | Exercise
 Price |   | Weighted Average
 Exercise 
 Price |             | Aggregate
 Intrinsic
 Value |  
|                                  |  |                                                                         |           |                           |  |                 |   |                                    |             |                             |   |      |  |   |           | 
|Balance at
 December 31, 2005     |  |                                                                         | 1,486,000 |                           |  | 1,715,000       |   | $                                  | 0.78$12.00 |                             | $ | 4.83 |  |   |           | 
|Shares reserved                   |  |                                                                         | 500,000   |                           |  |                |   |                                    |            |                             |   |     |  |   |           | 
|Granted                           |  |                                                                         | (74,000   | )                         |  | 74,000          |   |                                    | 7.88        |                             |   | 7.88 |  |   |           | 
|Exercised                         |  |                                                                         |          |                           |  | (198,000        | ) |                                    | 0.78 7.48  |                             |   | 1.73 |  |   |           | 
|Forfeited                         |  |                                                                         | 53,000    |                           |  | (53,000         | ) |                                    | 0.78 9.46  |                             |   | 8.12 |  |   |           | 
|Expired                           |  |                                                                         | 26,000    |                           |  | (26,000         | ) |                                    | 0.84 9.46  |                             |   | 7.66 |  |   |           | 
|Balance at
 December 31, 2006     |  |                                                                         | 1,991,000 |                           |  | 1,512,000       |   | $                                  | 0.78$12.00 |                             | $ | 5.24 |  |   |           | 
|Shares reserved                   |  |                                                                         | 500,000   |                           |  |                |   |                                    |            |                             |   |     |  |   |           | 
|Granted                           |  |                                                                         | (75,000   | )                         |  | 75,000          |   |                                    | 9.41 9.58  |                             |   | 9.44 |  |   |           | 
|Exercised                         |  |                                                                         |          |                           |  | (116,000        | ) |                                    | 0.78 9.46  |                             |   | 2.01 |  |   |           | 
|Forfeited                         |  |                                                                         | 3,000     |                           |  | (3,000          | ) |                                    | 0.84 9.46  |                             |   | 8.27 |  |   |           | 
|Expired                           |  |                                                                         | 9,000     |                           |  | (9,000          | ) |                                    | 0.78 9.46  |                             |   | 4.24 |  |   |           | 
|Balance at
 December 31, 2007     |  |                                                                         | 2,428,000 |                           |  | 1,459,000       |   | $                                  | 0.78$12.00 |                             | $ | 5.74 |  |   |           | 
|Shares reserved                   |  |                                                                         | 500,000   |                           |  |                |   |                                    |            |                             |   |     |  |   |           | 
|Granted                           |  |                                                                         | (60,000   | )                         |  | 60,000          |   |                                    | 6.36        |                             |   | 6.36 |  |   |           | 
|Exercised                         |  |                                                                         |          |                           |  | (185,000        | ) |                                    | 0.84 6.74  |                             |   | 3.35 |  |   |           | 
|Forfeited                         |  |                                                                         | 5,000     |                           |  | (5,000          | ) |                                    | 6.74 9.46  |                             |   | 9.45 |  |   |           | 
|Expired                           |  |                                                                         | 83,000    |                           |  | (83,000         | ) |                                    | 6.74 12.00 |                             |   | 9.52 |  |   |           | 
|Balance at
 December 31, 2008     |  |                                                                         | 2,956,000 |                           |  | 1,246,000       |   | $                                  | 0.78$11.62 |                             | $ | 5.84 |  | $ | 4,235,000 | 
|Exercisable
 at December 31, 2008 |  |                                                                         |           |                           |  | 1,215,000       |   |                                    |             |                             | $ | 5.80 |  | $ | 4,182,000 | 

The weighted
average remaining contractual term of options exercisable at December 31, 2008,
was 4.5 years. The total intrinsic value of options exercised during fiscal
2008, 2007 and 2006, was $909,000, $903,000 and $1,163,000, respectively.

61

---



8. Stock Options and Restricted Shares
(Continued)

The following
table summarizes information about stock options outstanding at December 31,
2008:

|                                                  |  |                                          |  |                                                 |  |                                   |  |                                         |       |                                   |  |           |  |   |       |  | 
|------------------------------------------------- |  | ---------------------------------------- |  | ----------------------------------------------- |  | --------------------------------- |  | --------------------------------------- | ----- | --------------------------------- |  | --------- |  | - | ----- |  | 
|                                                  |  | Options Outstanding                      |  | Options Exercisable                             | 
|Range of             
          
 Exercise Prices |  | Outstanding 
 as of 
 December 31,
 2008 |  | Weighted
 Average
 Remaining
 Contractual
 Life |  | Weighted
 Average
 Exercise Price |  | Exercisable 
 as of
 December 31,
 2008 |       | Weighted
 Average
 Exercise Price | 
|                                                  |  |                                          |  |                                                 |  |                                   |  |                                         |       |                                   |  |           |  |   |       | 
|$0.78$0.84                                       |  |                                          |  | 299,000                                         |  | 4.0                               |  | $                                       | 0.84  |                                   |  | 299,000   |  | $ | 0.84  | 
|0.855.74                                         |  |                                          |  | 96,000                                          |  | 2.9                               |  |                                         | 2.48  |                                   |  | 96,000    |  |   | 2.48  | 
|5.756.00                                         |  |                                          |  | 173,000                                         |  | 0.9                               |  |                                         | 6.00  |                                   |  | 173,000   |  |   | 6.00  | 
|6.017.48                                         |  |                                          |  | 261,000                                         |  | 5.3                               |  |                                         | 6.78  |                                   |  | 240,000   |  |   | 6.82  | 
|7.499.58                                         |  |                                          |  | 301,000                                         |  | 6.7                               |  |                                         | 9.16  |                                   |  | 295,000   |  |   | 9.15  | 
|9.5911.62                                        |  |                                          |  | 116,000                                         |  | 5.8                               |  |                                         | 10.57 |                                   |  | 112,000   |  |   | 10.54 | 
|                                                  |  |                                          |  | 1,246,000                                       |  | 4.6                               |  | $                                       | 5.84  |                                   |  | 1,215,000 |  | $ | 5.80  | 

As of December 31, 2008,
there was $25,000 of total unrecognized compensation costs related to the
outstanding stock options, which is expected to be recognized over a weighted
average period of 0.20 years.

The holder of
a restricted share award is generally entitled at all times on and after the
date of issuance of the restricted shares to exercise the rights of a
shareholder of the Company, including the right to vote the shares and the
right to receive dividends on the shares. During 2008, 2007 and 2006 the
Company granted restricted shares to employees under the Stock Option Plan. The
restricted shares vest over a four-year period based on the continuation of
employment.

Restricted
share activity is summarized as follows:

|                              |  |                     |         |                                           |   |       | 
|----------------------------- |  | ------------------- | ------- | ----------------------------------------- | - | ----- | 
|                              |  | Shares
 Outstanding |         | Weighted
 Average Grant
 Date Fair
 Value |  
|                              |  |                     |         |                                           |   |       | 
|Balance at
 December 31, 2005 |  |                     |        |                                           | $ |      | 
|Granted                       |  |                     | 174,000 |                                           |   | 5.42  | 
|Vested                        |  |                     |        |                                           |   |      | 
|Forfeited                     |  |                     | (15,000 | )                                         |   | 5.41  | 
|Expired                       |  |                     |        |                                           |   |      | 
|Balance at
 December 31, 2006 |  |                     | 159,000 |                                           |   | 5.42  | 
|Granted                       |  |                     | 174,000 |                                           |   | 10.37 | 
|Vested                        |  |                     |        |                                           |   |      | 
|Forfeited                     |  |                     | (20,000 | )                                         |   | 8.03  | 
|Expired                       |  |                     |        |                                           |   |      | 
|Balance at
 December 31, 2007 |  |                     | 313,000 |                                           |   | 8.01  | 
|Granted                       |  |                     | 174,000 |                                           |   | 6.09  | 
|Vested                        |  |                     | (73,000 | )                                         |   | 5.50  | 
|Forfeited                     |  |                     | (44,000 | )                                         |   | 7.55  | 
|Expired                       |  |                     |        |                                           |   |      | 
|Balance at
 December 31, 2008 |  |                     | 370,000 |                                           | $ | 7.68  | 

62

---



8. Stock Options and Restricted Shares
(Continued)

As of December
31, 2008, there was $891,000 of total unrecognized compensation costs related
to the outstanding restricted shares, which is expected to be recognized over a
weighted average period of 1.33 years. The Company estimates the forfeiture
rate for restricted stock using 10% for key employees and 15% for non-key
employees.

The net
remaining shares available for grant under the Stock Option and Stock Award
Plan is 2,586,000 shares.

Deferred Compensation

In 2008, 2007,
and 2006, the Company recorded $-0-, $21,000 and $12,000, respectively, of
deferred compensation in connection with certain nonqualified stock options
granted to medical advisory board members. The weighted average fair value of
these options was $4.23. The deferred compensation recorded was amortized
ratably over the period that the options vest and was adjusted for options
which have been canceled. Vesting requirements for nonqualified stock options
under this plan will vary by individual grant. Deferred compensation expense
was $9,000, $26,000 and $31,000 for the years ended December 31, 2008, 2007,
and 2006, respectively.

9. Employee Stock Purchase Plan

The Company
has an Employee Stock Purchase Plan (the Purchase Plan) under which 1,900,000
shares of common stock have been reserved for issuance. Eligible employees may
contribute 1% to 10% of their compensation to purchase shares of the Companys
common stock at a discount of 15% of the market value at certain plan-defined
dates up to a maximum of 2,000 shares per purchasing period. The Purchase Plan
terminates in May 2010. In fiscal 2008, 2007 and 2006, 133,300 shares, 102,200
shares, and 88,500 shares, respectively, were issued under the Purchase Plan.
At December 31, 2008, 792,000 shares were available for issuance under the
Purchase Plan.

As of December 31, 2008,
there was $250,000 of total unrecognized compensation costs related to the
Purchase Plan, which is expected to be recognized over a weighted average
period of 0.55 years.

10. Employee Retirement Savings Plan

The Company
has an employee 401(k) retirement savings plan (the Plan). The Plan provides
eligible employees with an opportunity to make tax-deferred contributions into
a long-term investment and savings program. All employees over the age of 21
are eligible to participate in the Plan beginning with the first quarterly open
enrollment date following start of employment. The Plan allows eligible
employees to contribute up to 50% of their annual compensation, subject to a
maximum limit determined by the Internal Revenue Service, with the Company
contributing an amount equal to 25% of the first 5% contributed to the Plan.
The Company recorded an expense of $117,000, $144,000 and $120,000 for
contributions to the Plan for the years ended December 31, 2008, 2007, and
2006, respectively.

11. Concentrations of Credit and Other Risks

In the United
States the Company sells its products directly to hospitals and clinics. In all
international markets, the Company sells its products to distributors who, in
turn, sell to medical clinics. Loss, termination, or ineffectiveness of
distributors to effectively promote the Companys product could have a material
adverse effect on the Companys financial condition and results of operations.

63

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11. Concentrations of Credit and Other Risks
(Continued)

No customer
represented more than 10% of total revenue for any year ended December 31,
2008, 2007 and 2006.

The Company
performs credit evaluations of its customers and does not require collateral to
establish an account receivable. No customer represented more than 10% of gross
accounts receivable at December 31, 2008 and 2007. There have been no material
losses on customer receivables.

Product
revenue by geographic destination as a percentage of total product revenues
were as follows for the years ended December 31:

|         |  |      |   |      |    |      |  |    |   | 
|-------- |  | ---- | - | ---- | -- | ---- |  | -- | - | 
|         |  | 2008 |   | 2007 |    | 2006 | 
|         |  |      |   |      |    |      | 
|Domestic |  | 87   | % |      | 87 | %    |  | 88 | % | 
|Foreign  |  | 13   |   |      | 13 |      |  | 12 |   | 

12. Related Party Activity

During the
years ended December 31, 2008, 2007 and 2006, the Company sold $495,000,
$489,000 and $518,000, respectively, of product to a company of which a board member
of the Company is an officer. As of December 31, 2008 and 2007, the Company had
an accounts receivable balance due of $47,000 and $72,000 from this related
party.

In July 2008
the Company began utilizing the consulting services from a company owned by a
board member. During the year ended December 31, 2008, the Company utilized
services in the amount of $170,000 from this vendor. At December 31, 2008, the
Company had an accounts payable balance due of $68,000 for this related party.

13. Dependence on Key Suppliers

King Pharmaceuticals

The Company
purchases certain key components from single-source suppliers. Any significant
component delay or interruption could require the Company to qualify new
sources of supply, if available, and could have a material adverse effect on
the Companys financial condition and results of operations. The Company
purchases its requirements for thrombin (a component in the D-Stat products)
under a Thrombin-JMI Supply Agreement entered into with King Pharmaceuticals,
Inc. (King) on January 9, 2007. Under the terms of the Thrombin-JMI Supply Agreement, King
agrees to manufacture and supply thrombin to the Company on a non-exclusive
basis. The Thrombin-JMI Supply Agreement does not contain any minimum purchase
requirements. King agrees to supply the Company with such quantity of thrombin
as the Company may order at a fixed price throughout the term of the
Thrombin-JMI Supply Agreement as adjusted for inflation, variations in potency
and other factors. The Thrombin-JMI Supply Agreement has an initial term of 10
years, followed by successive automatic one-year extensions, subject to
termination by the parties under certain circumstances, including: (i)
termination by King without cause any time after the fifth anniversary of the date
of the Thrombin-JMI Supply Agreement upon five years prior written notice to
the Company, and (ii) termination by the Company without cause any time after
the fifth anniversary of the date of the Thrombin-JMI Supply Agreement upon
five years prior written notice to King provided that the Device Supply
Agreement, which the Company also entered into with King on January 9, 2007,
has expired on its terms or the parties have agreed to terminate it.

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13. Dependence on Key Suppliers (Continued)

Sigma

On October 18,
2004, the Company entered into a supply agreement with Sigma-Aldrich Fine
Chemicals, an operating division of Sigma-Aldrich, Inc. (Sigma) for the supply
of thrombin to the Company. Pursuant to the terms of the Sigma agreement, the
Company agreed to pay certain development costs of Sigma to allow Sigma to
manufacture thrombin for the Companys needs in manufacturing its hemostatic
products. The payments were based on the achievement of certain milestones over
a two-year period and all payment obligations have been fulfilled. The Sigma
agreement terminates after ten years and is automatically extended for up to
five additional successive one-year terms unless one party delivers notice of
termination at least one year prior to the scheduled termination of the Sigma
agreement. During the term of the agreement, Sigma has agreed not to sell
thrombin of the type developed for the Company under the agreement in or as a
component of a hemostatic product for medical use. The Company does not have
any minimum purchase requirements under the Sigma agreement; however, if the
Company purchases less than three lots of thrombin in any year commencing in
2008, then (i) Sigma will be released from its agreement not to sell thrombin
in or as a component of a hemostatic product for medical use and (ii) Sigma
will have the right to terminate the agreement on 30 days notice.

14. Commitments and Contingencies

All legal cost
related to litigation are charged to operations as incurred, except settlements
which are expensed when a claim is probable and estimatable.

Diomed Litigation

On March 4, 2004, the
Company was named as the defendant in an intellectual property lawsuit brought
by Diomed Inc. (Diomed) in the United States District Court for the District of
Massachusetts (the Court). The complaint requested a judgment that sales of
the Companys Vari-Lase® procedure kit and Vari-Lase laser console
infringe on a single method patent (No. 6,398,777) held by Diomed and asked for
relief in the form of an injunction that would prevent the Company from selling
the Companys Vari-Lase products, compensatory and treble damages caused by the
manufacture and sale of the Companys products, and other costs, disbursements
and attorneys fees. The trial commenced on March 12, 2007, and concluded on
March 28, 2007 when the jury reached a verdict that the Company contributed to
and induced infringement of Diomeds patent and awarded monetary damages in the
amount of $4,100,000, plus pre-judgment interest. To settle Diomeds claims for
pre-judgment interest and for additional damages for sales not considered by
the jury, the Company agreed to amend the judgment amount to $4,975,000 and
accrued this amount together with additional costs and attorneys fees as of
June 30, 2007 in the aggregate amount of $5,690,000. The jury concluded there
was no willful infringement by the Company and therefore the award was not
subject to treble damages or attorneys fees. On April 12, 2007 the Company
converted all Vari-Lase sales to the Companys new Vari-Lase Bright TipTM
fiber which features a proprietary ceramic distal tip that prevents even the
possibility of the vein wall contact that was the requirement of Diomeds sole
patent claim in the litigation. On June 20, 2007 the Company posted a
supersedeas bond and appealed the jury verdict to the U.S. Court of Appeals for
the Federal Circuit in Washington, D.C. On July 2, 2007 the Court granted an
injunction order that applies to endovenous laser therapy kits that were sold
by the Company as of the trial date and any other kits that are not more than a
mere colorable variation of such kits. Concerning the laser consoles, the
injunction order applies only to Vari-Lase consoles of the type that were sold
at the time of trial and that are not more than a mere colorable variation of
such consoles and that are sold for use with the kits that are subject to the
injunction. On July 11, 2007, Diomed moved for a finding that the Companys
continued sale of laser consoles was in violation of the injunction. The Company
filed a response to the motion and requested a hearing on the matter. On
January 15, 2008, the Court denied Diomeds contempt motion and ruled that the
Companys sale of laser consoles did not violate the injunction. On April 8,
2008, the Company announced that it entered into a settlement agreement with
Diomed. Pursuant to the settlement agreement, (i) on April 29, 2008, the Company
made a one-time payment of $3,586,000 to Diomed, (ii) the Company and Diomed
jointly dismissed the appeal with the U.S. Court of Appeals for the Federal
Circuit, and (iii) Diomed provided to the Company a satisfaction of judgment,
releasing the Company from the monetary obligations of the judgment imposed by
the Court in its entirety.

65

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14. Commitments and Contingencies (Continued)

Marine Polymer Technologies, Inc.

On May 11,
2005 the Company initiated a lawsuit for product disparagement and false
advertising against Marine Polymer Technologies, Inc., a Delaware corporation
(Marine Polymer). In the lawsuit, the Company alleged that Marine Polymer made
defamatory and disparaging statements concerning the Companys D-Stat®
Dry hemostatic bandage. The Company sought relief in the form of an injunction
to enjoin Marine Polymer from continuing to defame and disparage the Companys products,
damages as a result of such statements, and other costs, disbursements and
attorneys fees. Marine Polymer brought a counter-claim against the Company
including, among other claims, business defamation and product disparagement
for statements allegedly made by the Company concerning Marine Polymers
SyvekPatch®. Marine Polymer sought relief in the form of monetary
damages, costs, disbursements and attorneys fees. The trial commenced on March
24, 2008 in the United States District Court for the District of Massachusetts.
At the conclusion of the trial on April 7, 2008 the jury returned a verdict in
favor of the Company and against Marine Polymer for product disparagement
concerning statements made regarding the safety of the Companys D-Stat Dry hemostat
product. In its verdict, the jury found that Marine Polymers statements were
false and disparaged the D-Stat Dry product and awarded the Company $4,500,000
in monetary damages. The jury rejected Marine Polymers counterclaims in their
entirety. Following post trial motions, on June 30, 2008, the Court upheld the
jury verdict, granted the Companys request for a permanent injunction against
Marine Polymer for the statements that the jury found were false, and added
prejudgment interest on the jury verdict award in the amount of $592,124. On
July 14, 2008, Marine Polymer filed a Notice of Appeal with the U.S. First
Circuit Court of Appeals seeking to overturn the monetary damages and
injunction issued against them. Oral argument on Marine Polymers appeal is
scheduled to be held on February 4, 2009. Marine Polymer is not appealing the
Courts rejection of its counter claims.

VNUSÒMedical
Technologies Litigation

On October 13, 2005, the
Company was named as one of three defendants in an intellectual property
lawsuit brought by VNUSÒ Medical Technologies, Inc. (VNUS) in the
United States District Court for the Northern District of California. The
complaint requested a judgment that the Companys Vari-Lase procedure kit and
Vari-Lase laser console infringe on four patents held by VNUS and asked for
relief in the form of an injunction that would prevent the Company from selling
the Companys Vari-Lase products, compensatory and treble damages caused by the
manufacture and sale of these products, and other costs, disbursements and
attorneys fees. VNUS subsequently indicated that it was not pursuing its
allegation of infringement concerning one of the four patents. On June 2, 2008,
the Company entered into a settlement agreement with VNUS for the purpose of resolving
the lawsuit. Under the terms of the settlement agreement, (i) on June 4,
2008, the Company paid VNUS a royalty payment in the aggregate amount of
$3,116,000 related to all Vari-Lase® products shipped within the
United States through the end of the first quarter of 2008, (ii) the Company
agreed to pay a quarterly royalty on all on-going U.S. shipments of Vari-Lase
laser and kit products payable quarterly during the remaining life of the
applicable patents, (iii) VNUS granted the Company a non-exclusive and
non-sublicensable license to the applicable patents for use in endovenous laser
therapy, and (iv) all litigation between the parties was dismissed.

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

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14. Commitments and Contingencies (Continued)

King Agreements

On January 9, 2007, the
Company entered into three separate agreements with King: a License Agreement,
a Device Supply Agreement and a Thrombin-JMI® Supply Agreement. Under the License
Agreement, the Company licensed the exclusive rights to the Companys products
Thrombi-Pad, Thrombi-Gel and Thrombi-Paste to King in exchange for a one-time
license fee of $6,000,000. Under the Device Supply Agreement, the Company
agreed to manufacture the licensed products for sale to King in exchange for
two separate $1,000,000 milestone payments; one upon the first commercial sale
of Thrombi-Gel (which was received on May 31, 2007), and one upon the first
commercial sale of Thrombi-Paste. The Company is amortizing the $6,000,000
license fee on a straight-line basis over 10 years. The Company is amortizing
the $1,000,000 milestone payment that was received on May 31, 2007 over the
remaining 10-year license period and will amortize the additional $1,000,000
milestone payment over the remaining 10-year license period when it is
received. The unamortized license fee was $5,649,000 and $6,353,000 at December
31, 2008 and 2007, respectively. The amortization of license fee was $704,000
and $647,000 for the years ended December 31, 2008 and 2007, respectively.

Under the Device Supply
Agreement the Company agreed to pursue a surgical indication for the use of the
Thrombi-Gel and Thrombi-Paste products from the FDA. The Device Supply
Agreement requires the Company to make a one-time payment of $2,500,000 to King
if the FDA does not approve the surgical indication of Thrombi-Gel and a
one-time payment of $2,500,000 to King if the FDA does not approve the surgical
indication of Thrombi-Paste after performing a clinical study and submitting
the application. The Company believes the probability of paying these one-time
payments to King is remote, and therefore has not recorded any provision for
these payments.

Nicolai, GmbH Agreement

Effective April 1, 2008 the
Company entered into a five-year distribution agreement with Nicolai, GmbH. As
a result of entering into this distribution agreement, the Company no longer
maintains a direct sales force in Germany. In connection with this distribution
agreement, the Company received four installment payments of 125,000 Euros from
Nicolai, GmbH. The first of these four installment payments was due upon
execution of the agreement and was received on March 14, 2008. The second
installment payment was earned on June 30, 2008 and was received by the Company
on July 9, 2008. The third installment payment was earned on September 30, 2008
and was received by the Company on October 3, 2008. The fourth and final
installment payment was earned and received on December 31, 2008. The
installment payments are deferred and recognized ratably over the five-year
term of the distribution agreement. The agreement also includes provisions
requiring the Company to pay Nicolai, GmbH specific amounts if the Company
terminates the distribution agreement prior to the end of the five-year term.
The Company does not intend to terminate the distribution agreement and, as
such, has not recorded a liability relating to these potential future payments
to Nicolai, GmbH. The unamortized license fee was $617,000 at December 31,
2008. The amortization of license fee was $114,000 for the year ended December
31, 2008.

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15. Quarterly Financial Data (Unaudited, in
Thousands, Except per Share Data)

|                                     |  |                 |        |                 |   |                 |   |                 |        |   |   |        |  
|------------------------------------ |  | --------------- | ------ | --------------- | - | --------------- | - | --------------- | ------ | - | - | ------ | -
|2008                                 |  | Fourth
 Quarter |        | Third 
 Quarter |   | Second
 Quarter |   | First 
 Quarter |       
|Revenue:                             |  |                 |        |                 |   |                 |   |                 |        |   |   |        |  
|Product                              |  | $               | 16,059 |                 | $ | 15,089          |   | $               | 14,872 |   | $ | 13,737 |  
|License and collaboration            |  |                 | 345    |                 |   | 376             |   |                 | 366    |   |   | 377    |  
|Total revenue                        |  |                 | 16,404 |                 |   | 15,465          |   |                 | 15,238 |   |   | 14,114 |  
|                                     |  |                 |        |                 |   |                 |   |                 |        |   |   |        |  
|Selected
 costs and expenses:        |  |                 |        |                 |   |                 |   |                 |        |   |   |        |  
|Product                              |  |                 | 5,619  |                 |   | 5,130           |   |                 | 5,360  |   |   | 4,581  |  
|Collaboration                        |  |                 | 126    |                 |   | 138             |   |                 | 187    |   |   | 181    |  
|Total selected costs and expenses:   |  |                 | 5,745  |                 |   | 5,268           |   |                 | 5,547  |   |   | 4,762  |  
|                                     |  |                 |        |                 |   |                 |   |                 |        |   |   |        |  
|Operating
 income (loss)             |  |                 | 1,457  |                 |   | 1,748           |   |                 | (444   | ) |   | 254    |  
|                                     |  |                 |        |                 |   |                 |   |                 |        |   |   |        |  
|Net income
 (loss)                   |  |                 | 14,684 |                 |   | 1,722           |   |                 | (468   | ) |   | 235    |  
|                                     |  |                 |        |                 |   |                 |   |                 |        |   |   |        |  
|Basic net
 income (loss) per share   |  | $               | 0.93   |                 | $ | 0.11            |   | $               | (0.03  | ) | $ | 0.02   |  
|Diluted net
 income (loss) per share |  | $               | 0.90   |                 | $ | 0.11            |   | $               | (0.03  | ) | $ | 0.01   |  
|                                     |  |                 |        |                 |   |                 |   |                 |        |   |   |        |  
|2007                                 |  |                 |        |                 |   |                 |   |                 |        |   |   |        |  
|Revenue:                             |  |                 |        |                 |   |                 |   |                 |        |   |   |        |  
|Product                              |  | $               | 13,797 |                 | $ | 12,529          |   | $               | 12,934 |   | $ | 12,154 |  
|License and collaboration            |  |                 | 559    |                 |   | 597             |   |                 | 294    |   |   |       |  
|Total revenue                        |  |                 | 14,356 |                 |   | 13,126          |   |                 | 13,228 |   |   | 12,154 |  
|                                     |  |                 |        |                 |   |                 |   |                 |        |   |   |        |  
|Selected
 costs and expenses:        |  |                 |        |                 |   |                 |   |                 |        |   |   |        |  
|Product                              |  |                 | 4,497  |                 |   | 4,187           |   |                 | 4,389  |   |   | 3,929  |  
|Collaboration                        |  |                 | 327    |                 |   | 358             |   |                 |       |   |   |       |  
|Total selected costs and expenses:   |  |                 | 4,824  |                 |   | 4,545           |   |                 | 4,389  |   |   | 3,929  |  
|                                     |  |                 |        |                 |   |                 |   |                 |        |   |   |        |  
|Operating
 income (loss)             |  |                 | 544    |                 |   | (6              | ) |                 | 660    |   |   | (5,524 | )
|                                     |  |                 |        |                 |   |                 |   |                 |        |   |   |        |  
|Net income
 (loss)                   |  |                 | 518    |                 |   | 15              |   |                 | 695    |   |   | (5,534 | )
|                                     |  |                 |        |                 |   |                 |   |                 |        |   |   |        |  
|Basic net
 income (loss) per share   |  | $               | 0.03   |                 | $ | 0.00            |   | $               | 0.05   |   | $ | (0.37  | )
|Diluted net
 income (loss) per share |  | $               | 0.03   |                 | $ | 0.00            |   | $               | 0.04   |   | $ | (0.37  | )

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