UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, 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   
|                                             |                                                                                         
|For the fiscal year ended December
 31, 2009
|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)

|                                                                |                                  
|--------------------------------------------------------------- | ---------------------------------
|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:


|                                                                  |                                            
|----------------------------------------------------------------- | -------------------------------------------
|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
whether the registrant has submitted electronically and posted on its corporate
Website, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during
the preceding 12 months (or ofr such shorter period that the registrant was
required to submit and post such files). Yes o
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.


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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, 2009 was $122,687,487.

As of
January 29, 2010, the number of shares outstanding of the registrants common
stock was 16,732,610.

DOCUMENTS INCORPORATED BY REFERENCE

Portions
of the Registrants Proxy Statement for its 2010 Annual Meeting of Shareholders
to be held on April 22, 2010 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 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 and Pronto LP extraction
 catheters, mechanical systems 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,                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                                                
| |  | 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, and                                                                  
| |   |                                                                                                                                                                                                                                                                                                
| |  | Specialty catheters,
 consisting of a variety of catheters for clinical niches including the
 Langston® dual lumen catheters, Twin-Pass® dual access
 catheters, GuideLiner catheter, Minnie support catheter, and
 Gopher catheter.                                                        

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
$68.4 million in 2009, with 99% of our 2009 net revenue coming from products
other than the Duett device. This increase in revenue represents a compound
annual growth rate of 31% 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, create new
interventional medical devices and then deliver these devices directly to the
physician through our direct domestic sales force and our international
distribution network. We are currently developing 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

An
estimated 80 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 2009. 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 2009 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.

For
information about our revenue, profits or losses and total assets, see our
Consolidated Financial Statements included in Item 8 of Part II of this 10-K.

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.

3

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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. In the first quarter of 2009 we received FDA clearance and began selling
a new version of the original D-Stat Dry bandage. This new product, the D-Stat®
Dry Wrap hemostatic bandage, contains a pre-cut specifically designed for the
control of bleeding around indwelling lines. 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 2009.

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 in
the United States, 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. In December
2009, we made further manufacturing improvements and launched a new version
called the D-Stat Rad-Band in the United States.

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.

4

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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.

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 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.

5

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During
2006 we launched the Twin-Pass dual access 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. We believe the Twin-Pass
addresses a market opportunity of between $1 million and $5 million annually
within interventional cardiology.

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. In August 2009 we launched our
new version of this catheter, referred to as the Gopher Gold catheter. The
Gopher Gold is designed for use when treating coronary and peripheral stenoses
over an existing in-place 0.014 guidewire and contains a highly radiopaque
gold-plated distal tip. We believe the market opportunity of the Gopher is in
excess of $2 million per year.

In
January 2009 we launched the Minnie support catheter. The Minnie support
catheter is designed to provide superior guidewire support and exchange for
complex interventions. We believe the current market size for support catheters
is greater than $15 million per year.

In
November 2009 we launched the GuideLiner catheter. The GuideLiner catheter is a
unique coaxial mother and child guide extension with rapid exchange
convenience that enables deep seating, guide back-up support and selective
intubation in challenging coronary interventions. We believe the market
opportunity of the GuideLiner is in excess of $15 million per year.

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. In November 2009 we launched a second generation version called the
Guardian II hemostatic valve. The Guardian II has a shorter overall length and
clear rotating components.

During
2008 we entered into an agreement with Radius Medical to distribute their Micro
Elite and Expro Elite 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.

During
2009 we entered into an agreement with Perouse Medical to distribute their
Flamingo inflation device within the United States. The Flamingo is designed
for use during cardiovascular procedures to create, maintain and monitor
pressures.

In
March 2009 we launched the Grebset micro-introducer kit and in November 2009
we launched the PiggyBack wire converter. The Grebset is a unique
micro-introducer kit with an angled tip that facilitates steerability. The
PiggyBack converts the 0.014 guidewire into a 0.035 delivery device,
preserving the position of the 0.014 guidewire and eliminating the need to
switch-out or exchange guidewires.

6

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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). 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.

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 made 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, King will be
required to make another one-time, non-refundable milestone payment to us of
$1.0 million. As directed by King, we will continue to perform the regulatory
work necessary to obtain surgical approvals for the Thrombi-Gel products. King
has directed us to suspend the regulatory work on the Thrombi-Paste products
until further notice. 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 for both the Thrombi-Gel
products and Thrombi-Paste products if they are not approved by the FDA 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.

7

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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.

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 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 92 at the end of 2009, 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 2010 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.                                                                                                                                                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | 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 three years we have
 partnered with Radius Medical, Zerusa Limited and Perouse Medical 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.                                                                                                                                                     

8

---



Sales, Marketing and Distribution

In
2000 we commenced sales of our Duett sealing device in the United States
through our direct sales organization. As of December 31, 2009, our worldwide
sales force consisted of approximately 92 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.

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 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 $7,847,000 in 2009, $6,333,000 in 2008, and $5,418,000 in 2007 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.

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.

9

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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 February 2009
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.

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. Competitive patches include the SyvekPatch®,
which is manufactured and marketed by Marine Polymer Technologies, Inc., and
the HemCon® Patch, which is distributed by Cardinal
Health, Inc. and manufactured by Hemcon Medical Technologies, 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 MedRad, 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, Covidien sells an alternative endovenous procedure that utilizes
radiofrequency as opposed to laser energy for the treatment of varicose veins.

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.

We
have several competitors in the specialty catheter and access product lines,
including Cook® Medical.

10

---



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.

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. 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.

11

---



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.

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 have subsequently received the CE mark approval for other
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

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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 12 additional patents pending concerning our Duett
sealing device, Pronto catheter, Langston dual lumen pigtail catheter, D-Stat
Dry, the Vari-Lase product line, and other products. We also have
pursued international patent applications.

The
interventional medical device market in general and the endovenous laser
therapy field in particular, are characterized by frequent and substantial
intellectual property litigation. Currently, we are involved in litigation with
AngioDynamics, Inc., who has filed a lawsuit against us alleging that we have infringed U.S. Patent
No. 7,273,478 and U.S. Patent No. 7,559,329. (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 additional intellectual property claims in the future
related to our products. Our defense of any intellectual property claims,
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
these 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 we disclose 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 and use the trademarks Acolysis®, Acolysis System®, Acolysis System Therapeutic
Ultrasound Thrombolysis®,
Auto-Fill®, D-Stat®, Gandras®, Langston®, Pronto®, QXT Extraction Catheter®, Skyway®, Thrombix®, Thrombi-Gel®, Twin-Pass®, and Vari-Lase®, and we use the following
trademarks Axis, Bright Tip, Gator, Gopher, GrebSet,
GuideLiner, InnerChange, Jiffy, Max-Support, Minnie,
PiggyBack, Rad-Band, Trespass, 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, 2009, we had 266 full-time employees. Of these employees, 77
were in manufacturing activities, 119 were in sales and marketing activities,
28 were in research and development activities, 23 were in regulatory, quality
assurance and clinical research activities and 19 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, 2010 are as follows:

|                  |  |     |  |                                                                            
|----------------- |  | --- |  | ---------------------------------------------------------------------------
|Name              |  | Age |  | Position                                                                   
|Howard Root       |  | 49  |  | Chief
 Executive Officer and Director                                      
|James Hennen      |  | 37  |  | Chief
 Financial Officer, Vice President of Finance and Corporate Secretary
|Jonathan
 Hammond |  | 42  |  | Vice
 President of Manufacturing                                           
|Brett
 Demchuk    |  | 46  |  | Vice
 President of Quality                                                 
|William
 Rutstein |  | 57  |  | Vice
 President of International Sales                                     
|Susan
 Christian  |  | 41  |  | Vice
 President of Sales Operations                                        
|Carrie
 Powers    |  | 35  |  | Vice
 President of Marketing                                               

Howard Root has served as Chief Executive
Officer and a member of our Board of Directors since he co-founded Vascular
Solutions in February 1997. From 1990 to 1995, Mr. Root was employed by ATS
Medical, Inc., a mechanical heart valve company, most recently as Vice
President and General Counsel. Prior to joining ATS Medical, Mr. Root practiced
corporate law, specializing in representing emerging growth companies, at the
law firm of Dorsey & Whitney LLP for over five years. Mr. Root is also a
member of the Board of Directors of the Medical Device Manufacturers
Association (MDMA).

James
Hennen has served as our Chief Financial Officer
since January 2004. Mr. Hennen served as our Controller & Director of
Finance from February 2002 through December 2003. Prior to joining us, Mr.
Hennen served in 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 is a Certified Public Accountant
(inactive).

Jonathan
Hammond has served as our Vice President of
Manufacturing since January 2010. Mr. Hammond previously served as our Director
of Process Development from January 2008 to December 2009, our Process
Development Manager from January 2007 to December 2007, and our Senior Process
Development Engineer from the time he joined us in July of 2005 until December
2006. Prior to joining us, Mr. Hammond served as Senior Manufacturing Engineer
with Enpath Medical, a leading supplier of venous vessel introducers, where he
worked from November 2002 through June of 2005. From March 1993 through October
2002, Mr. Hammond served in various engineering and technical product
management roles for MICROVENA Corporation (ev3).

Brett
Demchuk has 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.

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 is a Certified Public Accountant (inactive).

14

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Carrie Powers has
served as our Vice President of Marketing since July 2009. Ms.
Powers previously served as our Senior Director of Product Management
and Training from July 2008 to June 2009, Director of Training from March 2007
to July 2008, Product Manager for the Hemostasis Product Line from July 2006 to
March 2007 and began her employment with us as an Associate Product
Manager for the Hemostasis Product Line from January 2006 to July 2006. Prior
to joining us, Ms. Powers was employed by St. Marys Hospital in Madison,
WI from 2002 to 2006, most recently as a Registered Nurse in an Interventional
Cardiac Catheterization Lab. Prior to this time, Ms. Powers worked in the areas
of home health, cardiac rehabilitation and community health education.

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.

We
have launched over 50 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.                            

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

From
1997 to 2007 we incurred net losses primarily from costs relating to the
development and commercialization of our new products. At December 31, 2009, we
had an accumulated deficit of $48.3 million. We believe that we have achieved a
level of consistent profitability from our continuing operations; however,
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.

15

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We are involved in
and may face additional 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.
Intellectual property litigation has proven to be very complex, and the outcome
of such litigation is difficult to predict. While we do not believe that any of
our products infringe any existing patent, it is highly likely that we will
continue to become subject to intellectual property claims with respect to our
new or existing products. Currently, we are involved in litigation with
AngioDynamics, Inc., who has filed a lawsuit against us alleging that we have infringed U.S. Patent
No. 7,273,478 and U.S. Patent No. 7,559,329. (See Legal Proceedings in
Item 3 of Part I of this Form 10-K.)

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.

Our
defense of intellectual property claims whether ongoing or 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
these 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
ongoing introduction of new products that affect the overall product mix make
the 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;

16

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| |   |                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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. We
cannot be sure that our product liability insurance coverage is adequate or
that it will continue to be available to us on acceptable terms, if at all.

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

The
existing market for interventional medical devices is intensely competitive. We
expect competition to increase further as companies develop new products and/or
modify their existing products to compete directly with ours. Each of our
products encounters competition from several medical device companies,
including Medtronic Inc., Boston Scientific Corporation, Covidien plc 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.

17

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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.

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.                                                            

18

---



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

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

ITEM 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 warehouse and 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 arguments on Marine Polymers appeal were
held on February 4, 2009. On December 23, 2009, the U.S. First Circuit Court of
Appeals affirmed the judgment against Marine Polymer for product disparagement.
As a result, the permanent injunction issued at the conclusion of the trial
will remain in effect, prohibiting Marine Polymer and its representatives from
making, publishing or disseminating certain disparaging statements concerning
the safety of our D-Stat products. Addressing the jurys award of $4.5 million
in damages, the Court determined that, due to differences in opinion among the
judges, we could either accept a $2.7 million award of damages, plus interest,
or insist upon a new trial limited to the issue of determining the reasonable
amount of damages. We accepted the $2.7 million award of damages plus interest,
and received $3.56 million from Marine Polymer on January 22, 2010. We will
record a litigation gain of $3.56 million in the first quarter of 2010.

19

---



On
July 29, 2009 AngioDynamics, Inc. (AngioDynamics) filed a lawsuit against us in
the U.S. District Court for the District of Delaware, alleging that we have
infringed U.S. Patent No. 7,273,478 and U.S. Patent No. 7,559,329.
Specifically, AngioDynamics alleges that doctors using our Bright Tip fibers
and procedure kits are using the methods claimed in those patents, and accuses
us of inducing and contributing to infringement. AngioDynamics has requested
injunctive relief and compensatory damages. On December 1, 2009 we filed our
answer, a counterclaim, and a separate motion to transfer the litigation to the
U.S. District Court for the District of Minnesota.

We
have also filed an inter partes request for reexamination of both the 478 and
329 patents with the United States Patent Office. The Patent Office granted
our inter partes requests for reexamination for both the 478 and 329 patents.
We expect the reexamination process for each patent will take at least three
years to conclude. On January 27, 2010, we filed a motion with the U.S.
District Court for the District of Delaware to stay all proceedings in the
litigation pending the outcome of the inter partes reexaminations.

From
time to time we are involved in additional 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 proceedings not described in this section in which an adverse
outcome would reasonably be expected to have a material adverse effect on our
results of operations or financial condition.

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

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 |  
|     |                 |  |      |      |     |  
|2009 |                 |  |      |      |     |   |      | 
|     | First
 Quarter  |  | $    | 9.55 |     | $ | 5.04 | 
|     | Second
 Quarter |  |      | 8.70 |     |   | 5.70 | 
|     | Third
 Quarter  |  |      | 8.80 |     |   | 7.10 | 
|     | Fourth
 Quarter |  |      | 9.80 |     |   | 7.60 | 
|     |                 |  |      |      |     |   |      | 
|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 | 

During
the quarter ended December 31, 2009, we repurchased shares of common stock from
our employees to satisfy income tax withholding obligations upon vesting of
outstanding restricted share awards for those employees. Shares purchase
activity for the fourth quarter of fiscal 2009 was as follows:

|                       |  |                                       |  |                                |  |                                                                                      |  |                                                                                              | 
|---------------------- |  | ------------------------------------- |  | ------------------------------ |  | ------------------------------------------------------------------------------------ |  | -------------------------------------------------------------------------------------------- | 
|Date                   |  | Total Number
 of Shares
 Purchased(1) |  | Average
 Price Paid
 per Share |  | Total Number of Shares
 Purchased
 as Part of Publicly
 Announced Plans or
 Programs |  | Approximate Dollar
 Value of Shares that
 May Yet be Purchased
 Under the Plans or
 Programs | 
|October 1 -
 31, 2009  |  | 1,614                                 |  | $9.03                          |  |                                                                                     |  |                                                                                             | 
|November 1 -
 30, 2009 |  |                                      |  |                               |  |                                                                                     |  |                                                                                             | 
|December 1 -
 31, 2009 |  |                                      |  |                               |  |                                                                                     |  |                                                                                             | 

| |     |                                                                                                                                                                                                                                                                                         
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | At the
 request of our employees and pursuant to the terms of their Restricted Stock
 Awards, we purchased 1,614 shares of common stock at the fair market value of
 the common stock on the day their awards vested to satisfy income tax
 withholding obligations for those employees.

Holders

As
of December 31, 2009, we had 140 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.

21

---



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, 2004 and the
reinvestment of dividends, if any.

(LINE GRAPH)

ITEM 6.
SELECTED FINANCIAL DATA

The
following selected financial data as of December 31, 2009 and 2008 and for the
three years ended December 31, 2009, 2008 and 2007 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,
2007, 2006 and 2005 and for the fiscal years ended December 31, 2006 and 2005
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,                  |       
|                                                     |  | 2009                                     |        | 2008 |   | 2007   |   | 2006 |        | 2005 |  
|                                                     |  | (in thousands, except per share amounts) |       
|Statements of Operations Data:                       |  |                                          |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Revenue:                                             |  |                                          |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Product revenue                                      |  | $                                        | 66,726 |      | $ | 59,757 |   | $    | 51,414 |      | $ | 43,310 |   | $ | 32,786 |  
|License and collaboration revenue                    |  |                                          | 1,701  |      |   | 1,464  |   |      | 1,450  |      |   |       |   |   |       |  
|Total revenue                                        |  |                                          | 68,427 |      |   | 61,221 |   |      | 52,864 |      |   | 43,310 |   |   | 32,786 |  
|                                                     |  |                                          |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Product costs and operating expenses:                |  |                                          |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Cost of sales                                        |  |                                          | 22,917 |      |   | 20,690 |   |      | 17,002 |      |   | 14,231 |   |   | 9,386  |  
|Cost of sales related to thrombin inventory          |  |                                          |       |      |   | 670    |   |      |       |      |   |       |   |   |       |  
|Collaboration expenses                               |  |                                          | 850    |      |   | 632    |   |      | 685    |      |   |       |   |   |       |  
|Research and development                             |  |                                          | 7,847  |      |   | 6,333  |   |      | 5,481  |      |   | 4,578  |   |   | 3,789  |  
|Clinical and regulatory                              |  |                                          | 2,886  |      |   | 3,220  |   |      | 3,168  |      |   | 2,493  |   |   | 2,006  |  
|Sales and marketing                                  |  |                                          | 21,206 |      |   | 20,482 |   |      | 19,603 |      |   | 17,097 |   |   | 13,681 |  
|General and administrative                           |  |                                          | 4,555  |      |   | 4,695  |   |      | 5,304  |      |   | 3,716  |   |   | 2,810  |  
|Thrombin qualification                               |  |                                          |       |      |   |       |   |      | 147    |      |   | 2,802  |   |   | 1,620  |  
|Litigation                                           |  |                                          |       |      |   | 1,484  |   |      | 5,800  |      |   |       |   |   |       |  
|Amortization of purchased technology                 |  |                                          |       |      |   |       |   |      |       |      |   | 72     |   |   | 218    |  
|Total product costs and operating expenses           |  |                                          | 60,261 |      |   | 58,206 |   |      | 57,190 |      |   | 44,989 |   |   | 33,510 |  
|                                                    
|Operating income (loss)                              |  |                                          | 8,166  |      |   | 3,015  |   |      | (4,326 | )    |   | (1,679 | ) |   | (724   | )
|                                                     |  |                                          |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Other income (expenses):                             |  |                                          |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Interest income                                      |  |                                          | 48     |      |   | 203    |   |      | 444    |      |   | 99     |   |   | 163    |  
|Interest expense                                     |  |                                          | (38    | )    |   | (62    | ) |      | (148   | )    |   | (206   | ) |   |       |  
|Foreign exchange loss                                |  |                                          | (10    | )    |   | (28    | ) |      |       |      |   |       |   |   |       |  
|                                                     |  |                                          |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Income (loss) before income taxes                    |  |                                          | 8,166  |      |   | 3,128  |   |      | (4,030 | )    |   | (1,786 | ) |   | (561   | )
|                                                     |  |                                          |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Income tax benefit (expense)                         |  |                                          | (2,788 | )    |   | 13,045 | * |      | (276   | )    |   |       |   |   |       |  
|Net income (loss)                                    |  | $                                        | 5,378  |      | $ | 16,173 |   | $    | (4,306 | )    | $ | (1,786 | ) | $ | (561   | )
|Net income (loss) per common share  Basic           |  | $                                        | 0.34   |      | $ | 1.04   |   | $    | (0.28  | )    | $ | (0.12  | ) | $ | (0.04  | )
|Net income (loss) per common share  Diluted         |  | $                                        | 0.33   |      | $ | 1.01   |   | $    | (0.28  | )    | $ | (0.12  | ) | $ | (0.04  | )
|Weighted average number of common shares outstanding |  |                                          | 16,047 |      |   | 15,588 |   |      | 15,238 |      |   | 14,910 |   |   | 14,515 |  

*
A complete discussion of the facts and circumstances surrounding this amount
can be found on page 27 of this 10-K.

|                                                                                     |  |                    |        |      |   |        |  |      |        |      |   |        |  |   |        | 
|------------------------------------------------------------------------------------ |  | ------------------ | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | - | ------ | 
|                                                                                     |  | As of December 31, |       
|                                                                                     |  | 2009               |        | 2008 |   | 2007   |  | 2006 |        | 2005 |  
|                                                                                     |  | (in thousands)     |       
|Balance Sheet Data:                                                                  |  |                    |        |      |   |        |  |      |        |      |   |        |  |   |        | 
|Cash, cash equivalents and available-for-sale securities (includes
 restricted cash) |  | $                  | 17,794 |      | $ | 7,209  |  | $    | 10,759 |      | $ | 2,557  |  | $ | 4,282  | 
|Working capital (includes restricted cash)                                           |  |                    | 35,145 |      |   | 22,677 |  |      | 14,530 |      |   | 11,472 |  |   | 10,887 | 
|Total assets                                                                         |  |                    | 51,755 |      |   | 44,180 |  |      | 31,278 |      |   | 20,967 |  |   | 19,896 | 
|Total shareholders equity                                                           |  |                    | 40,399 |      |   | 31,826 |  |      | 12,825 |      |   | 14,467 |  |   | 14,107 | 

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 that are not
strictly historical fact are made in reliance upon safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Forward-looking
statements are based on managements current expectations as of the date of
this report but involve risks, uncertainties and other factors which may cause
actual results to differ materially from those contemplated by such forward
looking statements. 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. We do not intend to update any
of these forward-looking statements after the date of this Form 10-K to conform
them to actual results.

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:

24

---



|                                                       |  |                         |     |      |  |      |   |  |     |   
|------------------------------------------------------ |  | ----------------------- | --- | ---- |  | ---- | - |  | --- | --
|                                                       |  | Year Ended December 31, |    
|                                                       |  | 2009                    |     | 2008 |  | 2007 |  
|Revenue:                                               |  |                         |     |      |  |      |   |  |     |   
|Product revenue                                        |  |                         | 98  | %    |  | 98   | % |  | 97  | % 
|License and collaboration revenue                      |  |                         | 2   | %    |  | 2    | % |  | 3   | % 
|Total revenue                                          |  |                         | 100 | %    |  | 100  | % |  | 100 | % 
|                                                       |  |                         |     |      |  |      |   |  |     |   
|Product costs and operating expenses:                  |  |                         |     |      |  |      |   |  |     |   
|Cost of sales                                          |  |                         | 34  | %    |  | 34   | % |  | 32  | % 
|Cost of sales related to thrombin inventory            |  |                         |    |      |  | 1    | % |  |    |   
|Collaboration expenses                                 |  |                         | 1   | %    |  | 1    | % |  | 1   | % 
|Research and development                               |  |                         | 11  | %    |  | 10   | % |  | 11  | % 
|Clinical and regulatory                                |  |                         | 4   | %    |  | 5    | % |  | 6   | % 
|Sales and marketing                                    |  |                         | 31  | %    |  | 34   | % |  | 37  | % 
|General and administrative                             |  |                         | 7   | %    |  | 8    | % |  | 10  | % 
|Thrombin qualification                                 |  |                         |    |      |  |     |   |  |    |   
|Litigation                                             |  |                         |    |      |  | 2    | % |  | 11  | % 
|Total product costs and operating expenses             |  |                         | 88  | %    |  | 95   | % |  | 108 | % 
|                                                      
|Operating income (loss)                                |  |                         | 12  | %    |  | 5    | % |  | (8  | %)
|                                                       |  |                         |     |      |  |      |   |  |     |   
|Interest income/expense and foreign exchange loss, net |  |                         |    |      |  |     |   |  | 1   | % 
|                                                       |  |                         |     |      |  |      |   |  |     |   
|Income (loss) before income taxes                      |  |                         | 12  | %    |  | 5    | % |  | (7  | %)
|                                                       |  |                         |     |      |  |      |   |  |     |   
|Income tax benefit (expense)                           |  |                         | (4  | %)   |  | 21   | % |  | (1  | %)
|Net Income (loss)                                      |  |                         | 8   | %    |  | 26   | % |  | (8  | %)

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, |           
|                        |  | 2009                         |            | 2008            |             | 2007 |   
|                        |  |                              |            | Percent
 Change |             |      |    | Percent
 Change |            |  |  | Percent
 Change |  
|                        |  | Net Revenue                  |            |                 | Net Revenue |      |    | Net Revenue     |            | 
|Hemostat products       |  | $                            | 24,428,000 |                 |             | 4    | %  | $               | 23,475,000 |  |  | (5%             | ) | $ | 24,712,000 |  |  | 14  | %
|Extraction catheters    |  |                              | 16,897,000 |                 |             | 13   | %  |                 | 14,992,000 |  |  | 36              | % |   | 11,016,000 |  |  | 22  | %
|Vein products           |  |                              | 11,225,000 |                 |             | 12   | %  |                 | 10,035,000 |  |  | 16              | % |   | 8,629,000  |  |  | 22  | %
|Access products         |  |                              | 7,298,000  |                 |             | 31   | %  |                 | 5,561,000  |  |  | 99              | % |   | 2,790,000  |  |  | 74  | %
|Specialty catheters     |  |                              | 5,905,000  |                 |             | 29   | %  |                 | 4,563,000  |  |  | 36              | % |   | 3,363,000  |  |  | 8   | %
|Other products          |  |                              | 973,000    |                 |             | (14  | %) |                 | 1,131,000  |  |  | 25              | % |   | 904,000    |  |  | 18  | %
|License & Collaboration |  |                              | 1,701,000  |                 |             | 16   | %  |                 | 1,464,000  |  |  | 1               | % |   | 1,450,000  |  |  | N/A |  
|                       
|Total Net Revenue       |  | $                            | 68,427,000 |                 |             | 12   | %  | $               | 61,221,000 |  |  | 16              | % | $ | 52,864,000 |  |  | 22  | %

Year ended December 31, 2009 compared to the years ended
December 31, 2008 and December 31, 2007.

Net
revenue increased 12% to $68,427,000 for the year ended December 31, 2009 from
$61,221,000 for the year ended December 31, 2008. The increase in net revenue
was primarily the result of an increased market penetration in all five of our
product categories as well as the introduction of new products. Approximately
87% of our net revenue was earned in the United States and 13% of our net
revenue was earned in international markets for both years ended December 31,
2009 and December 31, 2008. Net revenue increased 16% to $61,221,000 for the
year ended December 31, 2008 from $52,864,000 for the year ended December 31,
2007.

25

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We recognized $850,000 of licensing revenue during
the year ended December 31, 2009 as the result of our License Agreement and
Device Supply Agreement with King and our distribution agreement with Nicolai
in Germany. We also recognized $851,000 of collaboration revenue during the
year ended December 31, 2009 as a result of performing clinical and development
work for King under the Device Supply Agreement. We expect to recognize
approximately $850,000 of license revenue in 2010. We expect collaboration
revenue will continue in 2010 but at a lower level due to us completing the
enrollment of one of the clinical projects for King.

Gross
margin across all product lines increased to 66% for the year ended December
31, 2009 compared to 65% for the year ended December 31, 2008. We expect
product gross margins to be in the range of 65% to 67% in 2010, subject to
changes in our selling mix between our lower margin products such as the
Vari-Lase products and our higher margin products such as the D-Stat Dry. Gross
margin across all product lines declined to 65% for the year ended December 31,
2008 compared to 67% for the year ended December 31, 2007.

Cost
of sales related to thrombin inventory expenses were $-0- for the year ended
December 31, 2009, compared to $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
2010.

Collaboration
expenses were $850,000 for the year ended December 31, 2009, compared to
$632,000 for the year ended December 31, 2008 and $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 2010, dependent upon the timing of the collaboration revenue.

Research
and development expense for the year ended December 31, 2009 totaled
$7,847,000, or 11% of revenue, compared to $6,333,000, or 10% of revenue for
the year ended December 31, 2008 and $5,481,000, or 11% of revenue for the year
ended December 31, 2007. The increase in research and development expenses
resulted from additional new products moving through our development system in
2009. We expect our
continuing research and development expenses to be approximately 10% to 12% of
revenue in 2010 as we continue to pursue additional new products and to move
our longer term development projects forward.

Clinical
and regulatory expense for the year ended December 31, 2009 totaled $2,886,000,
or 4% of revenue, compared to $3,220,000, or 5% of revenue for the year ended
December 31, 2008 and $3,168,000, or 6% of revenue 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 in 2010.

Sales
and marketing expense for the year ended December 31, 2009 totaled $21,206,000,
or 31% of revenue, compared to $20,482,000, or 34% of revenue for the year
ended December 31, 2008 and $19,603,000, or 37% of revenue for the year ended
December 31, 2007. The primary reason for the increase in sales and marketing
expenses was a $467,000, or 13% increase in our commissions paid to our direct
sales force due to increased sales in 2009 over 2008. We expect to maintain the same relative size
of our direct sales force during 2010 at between 85 and 90 full-time sales
employees. As a result, we expect our sales and marketing expenses to continue
to decrease as a percent of revenue from approximately 31% to 32% of revenue at
the beginning of 2010 to between 27% and 29% of revenue by the end of 2010.

26

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General
and administrative expense for the year ended December 31, 2009 totaled
$4,555,000, or 7% of revenue, compared to $4,695,000, or 8% of revenue for the
year ended December 31, 2008 and $5,304,000, or 10% of revenue for the year
ended December 31, 2007. The
decrease was primarily the result of lower legal fees of approximately $380,000
as we settled the Diomed and Covidien litigation matters in the second half 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 2010.

Litigation
expenses were $-0- for the year ended December 31, 2009, compared to $1,484,000
for the year ended December 31, 2008 and $5,800,000 for the year ended December
31, 2007. For the year
ended December 31, 2009 we did not recognize any gain resulting from the Marine
Polymer jury verdict. We received $3.56 million from Marine Polymer on January
22, 2010 and the gain will be recognized in the first quarter of 2010 (see Note
16 to the Consolidated Financial Statements included in Item 8 of Part II of
this Form 10-K). In the second quarter of 2008 we recorded a 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 the settlement of the
litigation with Covidien (see Note 14 to the Consolidated Financial Statements
included in Item 8 of Part II of this Form 10-K).

Interest
income decreased to $48,000 for the year ended December 31, 2009, compared to
$203,000 for the year ended December 31, 2008 and $444,000 for the year ended
December 31, 2007. The decrease in interest income was primarily the result of
lower interest rates being paid on our deposit funds held at the bank.

Interest
expense decreased to $38,000 for the year ended December 31, 2009, compared to
$62,000 for the year ended December 31, 2008 and $148,000 for the year ended
December 31, 2007. The decrease in interest expense was as a result of repaying
our equipment line of credit during the year ended December 31, 2008.

Foreign
exchange loss decreased to $10,000 for the year ended December 31, 2009,
compared to $28,000 for the year ended December 31, 2008 and $-0- for the year
ended December 31, 2007.

Income
tax expense increased to $2,788,000 on income before taxes of $8,166,000
resulting in an income tax rate of 34% for the year ended December 31, 2009,
compared to an income tax benefit of $13,045,000 for the year ended December
31, 2008 and 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 2009 and 2008, estimates of future profitability and
the overall prospects of our business, we determined that our current deferred
tax assets are adequate at December 31, 2009. In the fourth quarter of 2008 we
determined it was more likely than not that we would 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. 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 2009 and 2008, 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.

27

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As
of December 31, 2009, we had approximately $40.3 million and $4.5 million of
federal and state net operating loss carryforwards available to offset future
taxable income which begin to expire in the year 2020. As of December 31, 2009,
we also had federal and state research and development tax credit carryforwards
of approximately $4.0 million which begin to expire in the year 2012. As of
December 31, 2009, we also had a foreign tax loss carryforward of approximately
$357,000, 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.

Liquidity and Capital Resources

Our
cash and cash equivalents totaled $17,794,000 at December 31, 2009 compared to
$7,209,000 in cash and cash
equivalents at December 31, 2008, an increase of $10,585,000. Our cash
equivalents are invested in a money market fund invested in all types of high
quality, short-term money market instruments denominated in U.S. dollars such
as debt instruments guaranteed by the governments of the United States,
Western Europe, Australia, Japan and Canada, high quality corporate issuers and
bank obligations. The money market funds assets are rated in the highest
short-term category by nationally recognized rating agencies, such as Moodys
or Standard & Poors.

Cash
provided by operations. We generated $10,374,000 of cash from
operations during the year ended December 31, 2009. The cash generated during
2009 primarily resulted from our income before taxes of $8,166,000 since
essentially all of our income taxes are offset by our deferred tax assets.

Cash
used for investing activities.We used $1,325,000 of cash in
investing activities during the year ended December 31, 2009. We incurred
capital expenditures of $1,325,000 relating primarily to additional
manufacturing equipment, leasehold improvements as part of our facility
expansion and additional research and development equipment.

Cash
provided by financing activities.We generated $1,536,000 of
cash in financing activities during the year ended December 31, 2009. We used
$354,000 of cash to repurchase shares that vested under outstanding restricted
stock awards for income tax withholding purposes. This was offset by our receipt
of $1,890,000 of cash we received under our Employee Stock Purchase Plan and
upon the exercise of outstanding stock options.

We
have a $10 million revolving line of credit with US Bank, which has a 12-month
term, bears interest at the rate of LIBOR plus 1.60% and is secured by a first
security interest on all of our assets. The credit facility includes one
covenant that we cannot have a maximum cash flow leverage ratio greater than
2.5 to 1. The calculation of this covenant is determined by multiplying our
annual lease expenses times six and adding any loans, then dividing this amount
by the sum of our earnings before interest, taxes, depreciation, amortization
and our annual operating lease payments. We were in compliance with this covenant
on December 31, 2009. As of December 31, 2009, we had no outstanding balance on
the $10 million revolving line of credit with an availability of $10 million.

The
following table summarizes our contractual cash commitments as of December 31,
2009:

|                          |  |                         |           |  |                    |         |              |   |           |  |   |           |                     |   |         | 
|------------------------- |  | ----------------------- | --------- |  | ------------------ | ------- | ------------ | - | --------- |  | - | --------- | ------------------- | - | ------- | 
|                          |  | Payments
 Due by Period |          
|                          |  |                         |           |  | Less than 
 1 year |         |              |   |           |  |   |           | More than
 5
 years |  
|Contractual Obligation    |  | Total                   |           |  | 1 - 3
 years       |         | 3 - 5
 years |   |          
|Facility operating leases |  | $                       | 4,679,000 |  | $                  | 761,000 |              | $ | 1,605,000 |  | $ | 1,682,000 |                     | $ | 631,000 | 

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

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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 $35.1 million at December 31, 2009 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.

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.

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, 2009, 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, [ASC 605-10-S99], 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,
[ASC 605-25], 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,[ASC 605-10-S99].

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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 500,000
Euros from Nicolai, GmbH in 2008. The payment was deferred and is being
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.

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. In 2009 King decided to suspend indefinitely the clinical
development of the Thrombi-Paste product. 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 will 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. No revenue was recognized under the Product Development & Supply Agreement
with the third party company for the year ended December 31, 2009 and none is
expected in 2010.

In
addition, we have reviewed the provisions of EITF Issue No. 07-01, Accounting
for Collaborative Arrangements,[ASC 808-10], 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, 2009, this reserve was $45,000
compared to $25,000 at December 31, 2008. 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, 2009, this reserve was $105,000 compared to $95,000 at December 31, 2008.
If the financial condition of our customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required.

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Warranty Costs

We
provide a warranty for certain products against defects in material and
workmanship for periods of up to 24 months. We record a liability for warranty
claims at the time of sale. The amount of the liability is based on the amount
we are charged by our original equipment manufacturer to cover the warranty
period. The original equipment manufacturer includes a 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, 2009, this warranty provision was $73,000
compared to $49,000 at December 31, 2008. If the assumptions used in
calculating the provision were to materially change, resulting in more defects
than anticipated, an additional provision may be required.

Income Taxes

The
carrying value of our net deferred tax assets assumes that we will be able to
generate sufficient taxable income in the United States 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, 2009, we recorded a $14.4 million
valuation allowance and a $727,000 reserve related to our net deferred tax
assets of $25.5 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, [ASC 740-10].
At December 31, 2009, 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. In the fourth quarter of 2008, based upon managements assessment of all
available evidence, including our cumulative adjusted pretax net income for
fiscal years 2008 and 2007 adjusted for certain non-recurring items allowed by FAS 109, [ASC 740-10], 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. 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 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. No additional
income tax benefits have been recorded for the year ended December 31, 2009.

New Accounting Pronouncement

In
June 2009, the FASB issued Statement of Financial Accounting Standards
No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles a
Replacement of FASB Statement No. 162(FAS 168), [ASC 105-10]. This
Standard establishes the FASB Accounting Standards Codification (the
Codification) as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with U.S. GAAP. The Codification does not
change current U.S. GAAP, but is intended to simplify user access to all
authoritative U.S. GAAP by providing all the authoritative literature related
to a particular topic in one place. The Codification was effective for interim
and annual periods ending after September 15, 2009, and as of the
effective date, all existing accounting standard documents have been
superseded. The Codification was effective for us in the third quarter of 2009,
and accordingly, our Quarterly Report on Form 10-Q for the quarter ending
September 30, 2009 and all subsequent public filings will reference the
Codification as the sole source of authoritative literature.

31

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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 we sell our products directly to hospitals and clinics. In
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, with the
exception of Germany, where sales are denominated in Euros.

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. A change of 0.1 in the Euro
exchange would result in an increase or decrease of approximately $21,000 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 LIBOR. 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,
2009, 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 $178,000 on an annual basis.

ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The
Consolidated Financial Statements and Notes thereto required pursuant to this
Item begin on page 40 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.

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Changes in Internal Controls.

During
the fiscal quarter ended December 31, 2009, 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, 2009.

Baker
Tilly Virchow Krause, LLP, an independent registered public accounting firm,
has issued an attestation report on our internal control over financial
reporting as of December 31, 2009.

Attestation Report of Independent Registered
Public Accounting Firm.

Baker
Tilly Virchow Krause, LLP, an independent registered public accounting firm,
has issued an attestation report on our internal control over financial
reporting as of December 31, 2009. The attestation report of Baker Tilly
Virchow Krause, LLP, on our internal control over financial reporting as of
December 31, 2009 is included on page 40 and incorporated by reference herein.

ITEM 9B.
OTHER INFORMATION

None.

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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, 2009.

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 posted our Code of Ethics in the Corporate Governance section of our
website, http://www.vascularsolutions.com.

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, 2009.

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, 2009.

34

---



Equity Compensation Plans

The
following table sets forth the securities authorized to be issued under our
current equity compensation plans as of December 31, 2009:

|                                                            |  |                                                                                         |           |                                                                      |   |                                                                                                                                               |  |  |           |       
|----------------------------------------------------------- |  | --------------------------------------------------------------------------------------- | --------- | -------------------------------------------------------------------- | - | --------------------------------------------------------------------------------------------------------------------------------------------- |  |  | --------- | ------
|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     |  |                                                                                         | 1,030,000 |                                                                      | $ | 6.06                                                                                                                                          |  |  | 3,651,000 | (1)(2)
|                                                            |  |                                                                                         |           |                                                                      |   |                                                                                                                                               |  |  |           |       
|Equity
 compensation plans not approved by security holders |  |                                                                                         | None      |                                                                      |   | None                                                                                                                                          |  |  | None      |       
|                                                            |  |                                                                                         |           |                                                                      |   |                                                                                                                                               |  |  |           |       
|Total                                                       |  |                                                                                         | 1,030,000 |                                                                      | $ | 6.06                                                                                                                                          |  |  | 3,651,000 |       

|    |                                                                                                                                                                                                                                                                         |   |                                                                                                
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | -----------------------------------------------------------------------------------------------
|(1) | Includes 2,800,000 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 851,000 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, 2009.

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, 2009.

35

---



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 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).                     
|10.2            |  | 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).                     
|10.3            |  | 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 99.2 of Vascular Solutions Form 8-K dated November 14, 2007).                  
|10.4            |  | 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)).
|10.5            |  | 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)).                             

36

---



|                |  |                                                                                                                                                                                                                                                                                                | 
|--------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|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***        |  | 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).              
|10.11***        |  | 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).
|10.12*          |  | Credit Agreement, dated
 December 21, 2009, between U.S. Bank Association and Vascular Solutions, Inc.                                                                                                                                                                                        
|10.13*          |  | Security Agreement, dated
 December 21, 2009, between U.S. Bank Association and Vascular Solutions, Inc.                                                                                                                                                                                      
|10.14*          |  | Promissory Note, dated
 December 21, 2009, between U. S. Bank Association and Vascular Solutions,
 Inc.                                                                                                                                                                                       
|10.15**         |  | Form of
 Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.1
 of Vascular Solutions Form 8-K dated September 22, 2004).                                                                                                                                              
|10.17**         |  | Form of
 Nonqualified Stock Option Agreement (incorporated by reference to Exhibit
 10.2 of Vascular Solutions Form 8-K dated September 22, 2004).                                                                                                                                           
|10.18**         |  | 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).                                                                                                         
|10.19**         |  | Form of Restricted Stock
 Award Agreement (incorporated by reference to Exhibit 10.3 of Vascular
 Solutions Form 8-K dated December 9, 2005).                                                                                                                                                
|10.20           |  | 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).                                                               
|10.21***        |  | 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).                                                         
|10.22***        |  | 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).                                                  
|10.23**         |  | 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).                                                       
|10.24           |  | 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).                                                                                               
|10.25***        |  | Settlement
 Agreement dated June 2, 2008 among VNUS Medical Technologies, Inc. (acquired
 by Covidien), 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).                  
|10.26**         |  | Separation
 Agreement and General Release dated December 31, 2009 between Vascular
 Solutions, Inc. and James H. Quackenbush (incorporated by reference to
 Exhibit 10.1 of Vascular Solutions Form 8-K dated December 31, 2009).                                                            
|23.1*           |  | Consent of
 Baker Tilly Virchow Krause, LLP.                                                                                                                                                                                                                                                  
|24.1            |  | Power of
 Attorney (included on signature page).                                                                                                                                                                                                                                              

37

---



|                |  |                                                                                                       | 
|--------------- |  | ----------------------------------------------------------------------------------------------------- | 
|Exhibit
 Number |  | Description                                                                                           | 
|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.

| | 
| | 
| | 

|                                                                                                                                                                                                                                                              
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* Filed
 herewith.                                                                                                                                                                                                                                            
|**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.

38

---



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 2nd day of
February 2010.

| |                           |                                      
| | ------------------------- | -------------------------------------
| | 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, 2009,
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 2nd day of February 2010, 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        |           |                                                                   
|                     |           |                                                                   
|                     |           | Director                                                          
|Michael Kopp         |           |                                                                   
|                     |           |                                                                   
|/s/ Paul OConnell   |           | Director                                                          
|Paul OConnell       |           |                                                                   
|                     |           |                                                                   
|/s/ John Erb         |           | Director                                                          
|John Erb             |           |                                                                   
|                     |           |                                                                   
|/s/ Jorge Saucedo    |           | Director                                                          
|Jorge Saucedo        |           |                                                                   
|                     |           |                                                                   
|/s/ Charmaine Sutton |           | Director                                                          
|Charmaine Sutton     |           |                                                                   

39

---



Report of Independent Registered Public
Accounting Firm

The Board of
Directors and Shareholders
Vascular Solutions, Inc.

Under date of
February 2, 2010, we reported on the consolidated balance sheets of Vascular
Solutions, Inc. as of December 31, 2009 and 2008, 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, 2009 as contained in
the annual report on Form 10-K for the year ended December 31, 2009. 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/ Baker Tilly Virchow Krause, LLP
|                       |                                    
|Minneapolis, Minnesota |                                    
|February 2,
 2010      |                                    

40

---



SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

|                                |  |                                |         |                                             |   |                  |  |                          |         |   |   |         | 
|------------------------------- |  | ------------------------------ | ------- | ------------------------------------------- | - | ---------------- |  | ------------------------ | ------- | - | - | ------- | 
|Description                     |  | Balance at
 Beginning
 of Year |         | Additions
 Charged
 to Costs
 and
 Expenses |   | Less
 Deductions |  | Balance at
 End of
 Year |        
|                                |  |                                |         |                                             |   |                  |  |                          |         |   |   |         | 
|YEAR ENDED DECEMBER 31, 2009:   |  |                                |         |                                             |   |                  |  |                          |         |   |   |         | 
|Sales return allowance          |  | $                              | 25,000  |                                             | $ | 20,000           |  | $                        |        |   | $ | 45,000  | 
|Allowance for doubtful accounts |  |                                | 95,000  |                                             |   | 62,000           |  |                          | (52,000 | ) |   | 105,000 | 
|Total                           |  | $                              | 120,000 |                                             | $ | 82,000           |  | $                        | (52,000 | ) | $ | 150,000 | 
|                                |  |                                |         |                                             |   |                  |  |                          |         |   |   |         | 
|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 | 

41

---



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, 2009 and 2008, 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, 2009. We also have audited Vascular
Solutions, Inc.s internal control over financial reporting as of December 31, 2009,
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, 2009 and 2008, and the consolidated results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 2009 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, 2009, based on criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).

|                                   
|-----------------------------------
|/s/ Baker Tilly Virchow Krause, LLP
|                                   
|Minneapolis, Minnesota             
|February 2, 2010                   

42

---



Vascular Solutions, Inc.

Consolidated Balance Sheets

|                                                                                                           |  |             |             |      |   |             |  
|---------------------------------------------------------------------------------------------------------- |  | ----------- | ----------- | ---- | - | ----------- | -
|                                                                                                           |  | December 31 |            
|                                                                                                           |  | 2009        |             | 2008 |  
|Assets                                                                                                     |  |             |             |      |   |             |  
|Current assets:                                                                                            |  |             |             |      |   |             |  
|Cash and cash equivalents                                                                                  |  | $           | 17,794,000  |      | $ | 7,209,000   |  
|Accounts receivable, net of reserves of
 $150,000 and $120,000 at December 31, 2009 and 2008, respectively |  |             | 9,143,000   |      |   | 8,706,000   |  
|Inventories                                                                                                |  |             | 8,977,000   |      |   | 9,974,000   |  
|Prepaid expenses                                                                                           |  |             | 1,520,000   |      |   | 1,045,000   |  
|Current portion of deferred tax assets                                                                     |  |             | 4,500,000   |      |   | 2,680,000   |  
|Total current assets                                                                                       |  |             | 41,934,000  |      |   | 29,614,000  |  
|                                                                                                           |  |             |             |      |   |             |  
|Property and equipment, net                                                                                |  |             | 3,793,000   |      |   | 3,887,000   |  
|Intangible assets, net                                                                                     |  |             | 193,000     |      |   | 193,000     |  
|Deferred tax assets, net of current portion
 and liabilities                                               |  |             | 5,835,000   |      |   | 10,486,000  |  
|Total assets                                                                                               |  | $           | 51,755,000  |      | $ | 44,180,000  |  
|                                                                                                           |  |             |             |      |   |             |  
|Liabilities and shareholders equity                                                                       |  |             |             |      |   |             |  
|Current liabilities:                                                                                       |  |             |             |      |   |             |  
|Accounts payable                                                                                           |  | $           | 1,396,000   |      | $ | 2,022,000   |  
|Accrued compensation                                                                                       |  |             | 2,978,000   |      |   | 2,584,000   |  
|Accrued expenses                                                                                           |  |             | 865,000     |      |   | 848,000     |  
|Accrued royalties                                                                                          |  |             | 621,000     |      |   | 576,000     |  
|Current portion of deferred revenue                                                                        |  |             | 929,000     |      |   | 907,000     |  
|Total current liabilities                                                                                  |  |             | 6,789,000   |      |   | 6,937,000   |  
|                                                                                                           |  |             |             |      |   |             |  
|Long-term deferred revenue, net of current
 portion                                                        |  |             | 4,567,000   |      |   | 5,417,000   |  
|                                                                                                           |  |             |             |      |   |             |  
|Commitments and contingencies                                                                              |  |             |             |      |   |             |  
|                                                                                                           |  |             |             |      |   |             |  
|Shareholders equity:                                                                                      |  |             |             |      |   |             |  
|Common stock, $0.01 par value:                                                                             |  |             |             |      |   |             |  
|Authorized shares  40,000,000                                                                             |  |             |             |      |   |             |  
|Issued and outstanding shares  16,557,669
  2009; 16,027,519  2008                                      |  |             | 166,000     |      |   | 160,000     |  
|Additional paid-in capital                                                                                 |  |             | 88,481,000  |      |   | 85,292,000  |  
|Other                                                                                                      |  |             | 84,000      |      |   | 84,000      |  
|Accumulated deficit                                                                                        |  |             | (48,332,000 | )    |   | (53,710,000 | )
|Total shareholders equity                                                                                 |  |             | 40,399,000  |      |   | 31,826,000  |  
|Total liabilities and shareholders equity                                                                 |  | $           | 51,755,000  |      | $ | 44,180,000  |  

See accompanying notes.

43

---



Vascular Solutions, Inc.

Consolidated Statements of Operations

|                                                                     |  |                        |            |      |   |            |   |   |            |  
|-------------------------------------------------------------------- |  | ---------------------- | ---------- | ---- | - | ---------- | - | - | ---------- | -
|                                                                     |  | Year Ended December 31 |           
|                                                                     |  | 2009                   |            | 2008 |   | 2007       |  
|                                                                     |  |                        |            |      |   |            |   |   |            |  
|Revenue:                                                             |  |                        |            |      |   |            |   |   |            |  
|Product revenue                                                      |  | $                      | 66,726,000 |      | $ | 59,757,000 |   | $ | 51,414,000 |  
|License and collaboration revenue                                    |  |                        | 1,701,000  |      |   | 1,464,000  |   |   | 1,450,000  |  
|Total revenue                                                        |  |                        | 68,427,000 |      |   | 61,221,000 |   |   | 52,864,000 |  
|                                                                     |  |                        |            |      |   |            |   |   |            |  
|Product costs and operating expenses:                                |  |                        |            |      |   |            |   |   |            |  
|Cost of goods sold                                                   |  |                        | 22,917,000 |      |   | 20,690,000 |   |   | 17,002,000 |  
|Cost of goods sold related to thrombin
 inventory                    |  |                        |           |      |   | 670,000    |   |   |           |  
|Collaboration expenses                                               |  |                        | 850,000    |      |   | 632,000    |   |   | 685,000    |  
|Research and development                                             |  |                        | 7,847,000  |      |   | 6,333,000  |   |   | 5,481,000  |  
|Clinical and regulatory                                              |  |                        | 2,886,000  |      |   | 3,220,000  |   |   | 3,168,000  |  
|Sales and marketing                                                  |  |                        | 21,206,000 |      |   | 20,482,000 |   |   | 19,603,000 |  
|General and administrative                                           |  |                        | 4,555,000  |      |   | 4,695,000  |   |   | 5,304,000  |  
|Litigation                                                           |  |                        |           |      |   | 1,484,000  |   |   | 5,800,000  |  
|Thrombin qualification                                               |  |                        |           |      |   |           |   |   | 147,000    |  
|Total product costs and operating expenses                           |  |                        | 60,261,000 |      |   | 58,206,000 |   |   | 57,190,000 |  
|                                                                     |  |                        |            |      |   |            |   |   |            |  
|Operating income (loss)                                              |  |                        | 8,166,000  |      |   | 3,015,000  |   |   | (4,326,000 | )
|                                                                     |  |                        |            |      |   |            |   |   |            |  
|Other income (expenses):                                             |  |                        |            |      |   |            |   |   |            |  
|Interest income                                                      |  |                        | 48,000     |      |   | 203,000    |   |   | 444,000    |  
|Interest expense                                                     |  |                        | (38,000    | )    |   | (62,000    | ) |   | (148,000   | )
|Foreign exchange loss                                                |  |                        | (10,000    | )    |   | (28,000    | ) |   |           |  
|                                                                     |  |                        |            |      |   |            |   |   |            |  
|Income (loss) before income taxes                                    |  |                        | 8,166,000  |      |   | 3,128,000  |   |   | (4,030,000 | )
|                                                                     |  |                        |            |      |   |            |   |   |            |  
|Income tax benefit (expense)                                         |  |                        | (2,788,000 | )    |   | 13,045,000 |   |   | (276,000   | )
|Net income (loss)                                                    |  | $                      | 5,378,000  |      | $ | 16,173,000 |   | $ | (4,306,000 | )
|                                                                     |  |                        |            |      |   |            |   |   |            |  
|Basic net income (loss) per common share                             |  | $                      | 0.34       |      | $ | 1.04       |   | $ | (0.28      | )
|Diluted net income (loss) per common share                           |  | $                      | 0.33       |      | $ | 1.01       |   | $ | (0.28      | )
|Shares used in computing basic net income
 (loss) per common share   |  |                        | 16,046,534 |      |   | 15,588,135 |   |   | 15,237,836 |  
|Shares used in computing diluted net income
 (loss) per common share |  |                        | 16,474,708 |      |   | 15,954,631 |   |   | 15,237,836 |  

See accompanying notes.

44

---



Vascular Solutions, Inc.

Consolidated Statements of Changes in
Shareholders Equity

|                                                                                   |  |              |            |        |   |         |       |                              |            |       |   |         |   |   |             |   |   |            |  
|---------------------------------------------------------------------------------- |  | ------------ | ---------- | ------ | - | ------- | ----- | ---------------------------- | ---------- | ----- | - | ------- | - | - | ----------- | - | - | ---------- | -
|                                                                                   |  |              |            |        |   |         |       | Additional
 Paid-In
 Capital |            |       |   |         |   |   |             |   |   |           
|                                                                                   |  | Common Stock |            |        |   |         |       | Accumulated
 Deficit         |            |       |   |        
|                                                                                   |  | Shares       |            | Amount |   |         | Other |                              |            | Total |  
|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 |  
|                                                                                   |  |              |            |        |   |         |       |                              |            |       |   |         |   |   |             |   |   |            |  
|Exercise of stock options                                                          |  |              | 247,990    |        |   | 3,000   |       |                              | 1,140,000  |       |   |        |   |   |            |   |   | 1,143,000  |  
|Issuance of common stock under the Employee Stock Purchase Plan                    |  |              | 140,790    |        |   | 1,000   |       |                              | 746,000    |       |   |        |   |   |            |   |   | 747,000    |  
|Stock option compensation                                                          |  |              | 180,500    |        |   | 2,000   |       |                              | 1,657,000  |       |   |        |   |   |            |   |   | 1,659,000  |  
|Repurchase and cancellation of common stock upon the vesting of
 restricted shares |  |              | (39,130    | )      |   |        |       |                              | (354,000   | )     |   |        |   |   |            |   |   | (354,000   | )
|Amortization of deferred compensation                                              |  |              |           |        |   |        |       |                              |           |       |   |        |   |   |            |   |   |           |  
|Comprehensive income:                                                              |  |              |            |        |   |         |       |                              |            |       |   |         |   |   |             |   |   |            |  
|Net income                                                                         |  |              |           |        |   |        |       |                              |           |       |   |        |   |   | 5,378,000   |   |   | 5,378,000  |  
|Translation adjustment                                                             |  |              |           |        |   |        |       |                              |           |       |   |        |   |   |            |   |   |           |  
|Total comprehensive income                                                         |  |              |            |        |   |         |       |                              |            |       |   |         |   |   |             |   |   | 5,378,000  |  
|Balance at December 31, 2009                                                       |  |              | 16,557,669 |        | $ | 166,000 |       | $                            | 88,481,000 |       | $ | 84,000  |   | $ | (48,332,000 | ) | $ | 40,399,000 |  

See accompanying notes.

45

---



Vascular
Solutions, Inc.

Consolidated
Statements of Cash Flows

|                                                                                                     |  |                        |            |      |   |             |   |   |            |  
|---------------------------------------------------------------------------------------------------- |  | ---------------------- | ---------- | ---- | - | ----------- | - | - | ---------- | -
|                                                                                                     |  | Year Ended December 31 |           
|                                                                                                     |  | 2009                   |            | 2008 |   | 2007        |  
|Operating
 activities                                                                                |  |                        |            |      |   |             |   |   |            |  
|Net income
 (loss)                                                                                   |  | $                      | 5,378,000  |      | $ | 16,173,000  |   | $ | (4,306,000 | )
|Adjustments to
 reconcile net income (loss) to net cash provided by (used in) operating
 activities: |  |                        |            |      |   |             |   |   |            |  
|Depreciation                                                                                         |  |                        | 1,418,000  |      |   | 1,469,000   |   |   | 1,376,000  |  
|Stock-based
 compensation                                                                            |  |                        | 1,659,000  |      |   | 1,677,000   |   |   | 1,457,000  |  
|Deferred
 compensation expense                                                                       |  |                        |           |      |   | 9,000       |   |   | 26,000     |  
|Deferred taxes,
 net                                                                                 |  |                        | 2,832,000  |      |   | (13,194,000 | ) |   | 28,000     |  
|Loss on disposal
 of fixed assets                                                                    |  |                        |           |      |   | 26,000      |   |   |           |  
|Change in
 accounts receivable allowance                                                             |  |                        | 30,000     |      |   | (10,000     | ) |   | 20,000     |  
|Changes in
 operating assets and liabilities:                                                        |  |                        |            |      |   |             |   |   |            |  
|Accounts
 receivable                                                                                 |  |                        | (467,000   | )    |   | (1,330,000  | ) |   | (848,000   | )
|Inventories                                                                                          |  |                        | 996,000    |      |   | (1,667,000  | ) |   | (1,080,000 | )
|Prepaid expenses                                                                                     |  |                        | (474,000   | )    |   | (235,000    | ) |   | (14,000    | )
|Accounts payable                                                                                     |  |                        | (626,000   | )    |   | 1,000       |   |   | 758,000    |  
|Accrued
 compensation and expenses                                                                   |  |                        | 456,000    |      |   | (5,091,000  | ) |   | 5,524,000  |  
|Deferred license
 fees received                                                                      |  |                        |           |      |   | 731,000     |   |   | 7,000,000  |  
|Amortization of
 deferred license fees and other deferred revenue                                    |  |                        | (828,000   | )    |   | (845,000    | ) |   | (562,000   | )
|Net cash
 provided by (used in) operating activities                                                 |  |                        | 10,374,000 |      |   | (2,286,000  | ) |   | 9,379,000  |  
|                                                                                                     |  |                        |            |      |   |             |   |   |            |  
|Investing
 activities                                                                                |  |                        |            |      |   |             |   |   |            |  
|Purchase of
 property and equipment, net                                                             |  |                        | (1,325,000 | )    |   | (1,536,000  | ) |   | (1,545,000 | )
|Cash deposits
 transferred from (to) restricted cash                                                 |  |                        |           |      |   | 5,473,000   |   |   | (5,473,000 | )
|Net cash
 provided by (used in) investing activities                                                 |  |                        | (1,325,000 | )    |   | 3,937,000   |   |   | (7,018,000 | )
|                                                                                                     |  |                        |            |      |   |             |   |   |            |  
|Financing
 activities                                                                                |  |                        |            |      |   |             |   |   |            |  
|Net proceeds
 from the exercise of stock options and stock warrants                                  |  |                        | 1,143,000  |      |   | 619,000     |   |   | 475,000    |  
|Net proceeds
 from the sale of common stock, employee stock purchase plan                            |  |                        | 747,000    |      |   | 702,000     |   |   | 667,000    |  
|Payments on
 long-term debt borrowings                                                               |  |                        |           |      |   | (867,000    | ) |   | (800,000   | )
|Repurchase and
 cancellation of common shares                                                        |  |                        | (354,000   | )    |   | (158,000    | ) |   |           |  
|Net cash
 provided by financing activities                                                           |  |                        | 1,536,000  |      |   | 296,000     |   |   | 342,000    |  
|Effect of
 exchange rate changes on cash and cash equivalents                                        |  |                        |           |      |   | (24,000     | ) |   | 26,000     |  
|Increase in cash
 and cash equivalents                                                               |  |                        | 10,585,000 |      |   | 1,923,000   |   |   | 2,729,000  |  
|Cash and cash
 equivalents at beginning of year                                                      |  |                        | 7,209,000  |      |   | 5,286,000   |   |   | 2,557,000  |  
|Cash and cash
 equivalents at end of year                                                            |  | $                      | 17,794,000 |      | $ | 7,209,000   |   | $ | 5,286,000  |  
|                                                                                                    
|Supplemental
 disclosure of cash flow                                                                |  |                        |            |      |   |             |   |   |            |  
|Cash paid for interest                                                                               |  | $                      | 39,000     |      | $ | 68,000      |   | $ | 155,000    |  
|Cash paid for taxes                                                                                  |  | $                      | 191,000    |      | $ | 252,000     |   | $ | 149,000    |  

See
accompanying notes.

46

---



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:

| |   |                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 and Pronto LP extraction catheters, mechanical systems
 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,                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                                                
| |  | 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,
 and                                                                  
| |   |                                                                                                                                                                                                                                                                                                
| |  | Specialty catheters, consisting of a variety of
 catheters for clinical niches including the Langston® dual lumen
 catheters, Twin-Pass® dual access catheters, GuideLiner catheter,
 Minnie support catheter, and Gopher catheter.                                                         

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.

47

---



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, |           
|                        |  | 2009                         |            | 2008            |  | 2007        |   
|                        |  | Net Revenue                  |            | Percent
 Change |  | Net Revenue |    | Percent
 Change |            | Net Revenue |  | Percent
 Change |   
|                        |  |                              |            |                 |  |             |    |                 |            |             |  |                 |    |   |            |  |  |     |  
|Hemostat products       |  | $                            | 24,428,000 |                 |  | 4           | %  | $               | 23,475,000 |             |  | (5              | %) | $ | 24,712,000 |  |  | 14  | %
|Extraction catheters    |  |                              | 16,897,000 |                 |  | 13          | %  |                 | 14,992,000 |             |  | 36              | %  |   | 11,016,000 |  |  | 22  | %
|Vein products           |  |                              | 11,225,000 |                 |  | 12          | %  |                 | 10,035,000 |             |  | 16              | %  |   | 8,629,000  |  |  | 22  | %
|Access products         |  |                              | 7,298,000  |                 |  | 31          | %  |                 | 5,561,000  |             |  | 99              | %  |   | 2,790,000  |  |  | 74  | %
|Specialty catheters     |  |                              | 5,905,000  |                 |  | 29          | %  |                 | 4,563,000  |             |  | 36              | %  |   | 3,363,000  |  |  | 8   | %
|Other products          |  |                              | 973,000    |                 |  | (14         | %) |                 | 1,131,000  |             |  | 25              | %  |   | 904,000    |  |  | 18  | %
|License & Collaboration |  |                              | 1,701,000  |                 |  | 16          | %  |                 | 1,464,000  |             |  | 1               | %  |   | 1,450,000  |  |  | N/A |  
|                        |  |                              |            |                 |  |             |    |                 |            |             |  |                 |    |   |            |  |  |     |  
|Total Net Revenue       |  | $                            | 68,427,000 |                 |  | 12          | %  | $               | 61,221,000 |             |  | 16              | %  | $ | 52,864,000 |  |  | 22  | %

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, 2009 and 2008 was $84,000 and $84,000,
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.

48

---



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.

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, 2009 and 2008, the allowance for
doubtful accounts was $105,000 and $95,000, 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, 2009 and 2008, the sales and
return allowance was $45,000 and $25,000, respectively.

Accounts receivable are shown net of the combined
total of the allowance for doubtful accounts and allowance for sales returns of
$150,000 and $120,000 at December 31, 2009 and 2008, respectively.

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:

|                |  |      |           |      |   |           | 
|--------------- |  | ---- | --------- | ---- | - | --------- | 
|                |  | 2009 |           | 2008 |  
|Raw materials   |  | $    | 4,382,000 |      | $ | 4,943,000 | 
|Work-in-process |  |      | 858,000   |      |   | 871,000   | 
|Finished goods  |  |      | 3,737,000 |      |   | 4,160,000 | 
|                |  | $    | 8,977,000 |      | $ | 9,974,000 | 

49

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2.
Summary of Significant Accounting Policies (Continued)

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 has not
incurred additional charges related to thrombin inventory during 2009 and does
not anticipate incurring additional charges related to thrombin inventory
during 2010.

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), [Accounting
Standards Codification (ASC) 605-10-S99], 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.

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.

50

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2. Summary of Significant Accounting Policies (Continued)

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, [ASC 605-25], 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, [ASC 605-10-S99].

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 is recognizing 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, [ASC 605-45-45], and
SAB104, [ASC 605-10-S99]. In 2009 King decided to suspend indefinitely further
development of the Thrombi-Paste products.

In addition, the Company has
reviewed the provisions of EITF Issue No. 07-01, Accounting for Collaborative
Arrangements,[ASC 808-10], 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, [ASC 605-45-45], the Company includes shipping and handling
revenues in net sales and shipping and handling costs in cost of goods
sold.

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.

51

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2. Summary of Significant Accounting Policies (Continued)

Warranty provisions and claims for the years ended December 31, 2009, 2008 and 2007, were as follows:

|                     |  |      |         |      |   |         |   |   |         |  
|-------------------- |  | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                     |  | 2009 |         | 2008 |   | 2007    |  
|Beginning
 balance   |  | $    | 49,000  |      | $ | 34,000  |   | $ | 46,000  |  
|Warranty
 provisions |  |      | 80,000  |      |   | 66,000  |   |   | 28,000  |  
|Warranty
 claims     |  |      | (56,000 | )    |   | (51,000 | ) |   | (40,000 | )
|Ending
 balance      |  | $    | 73,000  |      | $ | 49,000  |   | $ | 34,000  |  

Advertising
Costs

The Company
follows the policy of charging production costs of advertising to expense as
incurred. Advertising expense was $116,000, $110,000, and $77,000 for the years
ended December 31, 2009, 2008 and 2007, 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), [ASC
718], which requires companies to measure and recognize compensation expense
for all stock-based payments at fair value. SFAS 123R, [ASC 718], is being
applied on the modified prospective basis. Prior to the adoption of SFAS 123R,
[ASC 718], 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, [ASC 718], 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, [ASC 718], 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, [ASC 718].
Prior periods were not restated to reflect the impact of adopting the new standard.

52

---



2. Summary of Significant Accounting Policies (Continued)

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

|                                       |  |      |           |      |   |           |  |   |           | 
|-------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | --------- | 
|                                       |  | 2009 |           | 2008 |   | 2007      | 
|Stock-based
 compensation included in: |  |      |           |      |   |           |  |   |           | 
|Cost of
 goods sold                    |  | $    | 199,000   |      | $ | 207,000   |  | $ | 154,000   | 
|Research and
 development              |  |      | 234,000   |      |   | 170,000   |  |   | 164,000   | 
|Clinical and
 regulatory               |  |      | 38,000    |      |   | 132,000   |  |   | 102,000   | 
|Sales and
 marketing                   |  |      | 608,000   |      |   | 601,000   |  |   | 422,000   | 
|General and administrative             |  |      | 580,000   |      |   | 567,000   |  |   | 615,000   | 
|                                       |  | $    | 1,659,000 |      | $ | 1,677,000 |  | $ | 1,457,000 | 

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

|                              |  |      |       |      |  |       |  |  |       | 
|----------------------------- |  | ---- | ----- | ---- |  | ----- |  |  | ----- | 
|                              |  | 2009 |       | 2008 |  | 2007  | 
|Stock Options and Awards:     |  |      |       |      |  |       |  |  |       | 
|Expected
 life (years)        |  |      | 5.50  |      |  | 5.50  |  |  | 5.50  | 
|Expected
 volatility          |  |      | 52%   |      |  | 50%   |  |  | 51%   | 
|Dividend
 yield               |  |      | 0%    |      |  | 0%    |  |  | 0%    | 
|Risk-free
 interest rate      |  |      | 1.8%  |      |  | 2.75% |  |  | 4.64% | 
|                              |  |      |       |      |  |       |  |  |       | 
|Employee Stock Purchase Plan: |  |      |       |      |  |       |  |  |       | 
|Expected
 life (years)        |  |      | 2.0   |      |  | 2.0   |  |  | 2.0   | 
|Expected
 volatility          |  |      | 52%   |      |  | 42%   |  |  | 36%   | 
|Dividend
 yield               |  |      | 0%    |      |  | 0%    |  |  | 0%    | 
|Risk-free
 interest rate      |  |      | 1.03% |      |  | 2.04% |  |  | 3.48% | 

Restricted
stock awards fair value is calculated as the market price on the date of grant
for the years ended December 31, 2009 and 2008 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 2009,
2008 and 2007 was $9.14, $6.09 and $10.37, 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 2009, 2008 and 2007 was $2.65,
$2.82 and $4.51, 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.

53

---



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, [ASC 740-10], 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, [ASC
740-10]. Upon adoption, the Company had $425,000 of unrecognized income
tax benefits and the adoption of FIN 48, [ASC 740-10], had no effect on
shareholders equity. The Company has recorded FIN 48, [ASC 740-10], reserves
of $727,000 and $597,000 at December 31, 2009 and 2008. The impact of tax
related interest and penalties is recorded as a component of income tax
expense. At December 31, 2009, 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, [ASC 260-10], 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.

54

---



2. Summary of Significant Accounting Policies (Continued)

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

|                                                    |  |      |            |      |  |            |  |  |            | 
|--------------------------------------------------- |  | ---- | ---------- | ---- |  | ---------- |  |  | ---------- | 
|                                                    |  | 2009 |            | 2008 |  | 2007       | 
|Weighted
 average common shares outstandingbasic   |  |      | 16,046,534 |      |  | 15,588,135 |  |  | 15,237,836 | 
|Dilutive
 effect of stock options and warrants      |  |      | 428,174    |      |  | 366,496    |  |  |           | 
|Weighted
 average common shares outstandingdiluted |  |      | 16,474,708 |      |  | 15,954,631 |  |  | 15,237,836 | 

The dilutive
effect of stock options and warrants in the above table excludes 396,000,
448,500, and 441,500 of options and warrants for which the exercise price was higher
than the average market price for the years ended December 31, 2009, 2008 and
2007, respectively. In addition, dilutive potential common shares of 1,017,400
were excluded from diluted weighted average common shares outstanding for the
year ended December 31, 2007, as they would be anti-dilutive due to the
Companys net loss for that year.

Goodwill and Other Intangible Assets

In fiscal
2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, [ASC
350-20 and 350-30]. 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, 2009.

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, [ASC 840-10 and 840-20], which requires that
leases be evaluated and classified as operating or capital leases for financial
reporting purposes. As of December 31, 2009, all of the Companys leases were
accounted for as operating leases. For leases that contain rent escalations,
the Company records the total rent payable during the lease term on a
straight-line basis over the term of the lease and records the difference
between the rents paid and the straight-line rent as a deferred rent. For any
lease incentives the Company receives for items such as leasehold improvements,
the Company records a deferred credit for the amount of the lease incentive and
amortizes 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, [ASC 840-20].

New Accounting Pronouncement

In June 2009,
the FASB issued Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles a Replacement of FASB
Statement No. 162(FAS 168), [ASC 105-10]. This Standard
establishes the FASB Accounting Standards Codification (the Codification) as
the source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities in the preparation of financial statements
in conformity with U.S. GAAP. The Codification does not change current U.S.
GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by
providing all the authoritative literature related to a particular topic in one
place. The Codification was effective for
interim and annual periods ending after September 15, 2009, and as of the
effective date, all existing accounting standard documents will be superseded.
The Codification was effective for the Company in the third quarter of
2009, and accordingly, the Quarterly Report on Form 10-Q for the quarter ending
September 30, 2009 and all subsequent public filings will reference the
Codification as the sole source of authoritative literature.

55

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3. Goodwill and Other Intangible Assets

The Company
has adopted SFAS No. 141, Business Combinations,[ASC 805-10 and
805-20]. The Company acquired developed technology from Angiosonics, Inc. in
April 2002 and subsequently amortized the amount over its useful life of four
years. The goodwill of $193,000 acquired as part of this transaction is not
being amortized.

4. Property and Equipment

Property and equipment consists of the following at December 31:

|                                                |  |      |            |      |   |            |  
|----------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | -
|                                                |  | 2009 |            | 2008 |  
|Property and
 equipment:                        |  |      |            |      |   |            |  
|Manufacturing equipment                         |  | $    | 5,908,000  |      | $ | 5,067,000  |  
|Office and computer equipment                   |  |      | 1,888,000  |      |   | 1,815,000  |  
|Furniture and fixtures                          |  |      | 424,000    |      |   | 463,000    |  
|Leasehold improvements                          |  |      | 1,495,000  |      |   | 1,275,000  |  
|Research and development equipment              |  |      | 504,000    |      |   | 436,000    |  
|Construction-in-process                         |  |      | 61,000     |      |   | 213,000    |  
|                                                |  |      | 10,280,000 |      |   | 9,269,000  |  
|Less
 accumulated depreciation and amortization |  |      | (6,487,000 | )    |   | (5,382,000 | )
|Net property
 and equipment                     |  | $    | 3,793,000  |      | $ | 3,887,000  |  

5. Lines of Credit

On December
21, 2009, the Company entered into a secured asset-based revolving credit
agreement with U.S. Bank National Association. The revolving credit agreement
is a one-year, $10,000,000 facility with availability based primarily on
eligible customer receivables, inventory and property and equipment. The revolving
credit agreement bears interest equal to the one-month LIBOR rate plus 1.60%
and is secured by a first security interest on all of the Companys assets. The
revolving credit agreement requires a quarterly payment based on an annual fee
of 0.125% of the average unused portion of the committed revolving line as
determined by the bank and reviewed by management.

The revolving
credit agreement includes one covenant that the Company cannot have a maximum
cash flow leverage ratio greater than 2.5 to 1. The calculation of this
covenant is determined by multiplying annual lease expense times six and adding
any loans, then dividing this amount by the sum of earnings before interest,
taxes, depreciation, amortization and annual operating lease payments. The covenant
is computed quarterly based on a rolling 12-month period. The Company was in
compliance with all of the covenants as of December 31, 2009.

As of December 31, 2009, the
Company had no outstanding balance against the revolving credit agreement.
Based on the Companys eligible customer receivables, inventory, property and
equipment and cash balances, $10,000,000 was available for borrowing as of
December 31, 2009.

56

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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 $1,133,000, $755,000 and $596,000 for
the years ended December 31, 2009, 2008, and 2007, respectively.

Future minimum
lease commitments under these operating leases as of December 31, 2009
were as follows:

|           |  |   |           | 
|---------- |  | - | --------- | 
|2010       |  | $ | 761,000   | 
|2011       |  |   | 797,000   | 
|2012       |  |   | 808,000   | 
|2013       |  |   | 841,000   | 
|2014       |  |   | 841,000   | 
|Thereafter |  |   | 631,000   | 
|           |  | $ | 4,679,000 | 

7. Income Taxes

At December
31, 2009, the Company had net operating loss carryforwards of approximately
$40,276,000 and $4,521,000 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 $4.1 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, 2009,
the Company also had federal research and development tax credit carryforwards
of approximately $3,272,000 and Minnesota research and development tax credit
carryforwards of approximately $760,000, which begin to expire in the year
2012. At December 31, 2009, the Company has foreign tax loss carryforwards of
approximately $357,000 that do not expire. The adoption of FIN 48, Accounting for Uncertainty in Income Taxes,[ASC
740-10], has had no impact on the reported carryforwards at December 31, 2009.

The Company
adopted the provisions of FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes - an
Interpretation of SFAS No. 109,[ASC 740-10], 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, [ASC 740-10], 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, 2009, the Company has accrued zero for the
payment of tax related interest and there were no tax interest or penalties
recognized in the statements of operations.

The Company is
subject to income tax in numerous jurisdictions and at various rates and the
use of estimates is required in determining the provision for income taxes. For
the year ended December 31, 2009, the Company recorded a tax provision of
$2,788,000 on income before tax of $8,166,000 resulting in an effective income
tax rate of 34%.

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, 2009,
the Company was not under examination by any of these taxing authorities and
the open tax years are 2007 to 2009.

57

---



7. Income Taxes
(Continued)

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

|                                                                          |  |   |         | 
|------------------------------------------------------------------------- |  | - | ------- | 
|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 | 
|Increases as a result of tax positions
 taken during a prior period       |  |   | 2,000   | 
|Increases as a result of tax positions
 taken during the current period   |  |   | 128,000 | 
|Reductions as a result of lapse of the
 applicable statute of limitations |  |   |        | 
|Decreases relating to settlements with
 taxing authorities                |  |   |        | 
|Balance at
 December 31, 2009                                             |  | $ | 727,000 | 

The components
of the Companys deferred tax assets and liabilities as of December 31, 2009
and 2008 are as follows:

|                                                                         |  |      |             |      |   |             |  
|------------------------------------------------------------------------ |  | ---- | ----------- | ---- | - | ----------- | -
|                                                                         |  | 2009 |             | 2008 |  
|Deferred tax
 assets:                                                    |  |      |             |      |   |             |  
|Net operating loss carryforwards                                         |  | $    | 16,942,000  |      | $ | 19,538,000  |  
|Tax credit carryforwards                                                 |  |      | 4,759,000   |      |   | 4,274,000   |  
|Deferred revenue                                                         |  |      | 2,049,000   |      |   | 2,353,000   |  
|Depreciation and amortization                                            |  |      | 171,000     |      |   | 206,000     |  
|Accrued compensation                                                     |  |      | 335,000     |      |   | 304,000     |  
|Stock-based compensation                                                 |  |      | 609,000     |      |   | 530,000     |  
|Federal and state AMT credits                                            |  |      | 143,000     |      |   | 195,000     |  
|Inventory reserve                                                        |  |      | 325,000     |      |   | 334,000     |  
|Other                                                                    |  |      | 155,000     |      |   | 138,000     |  
|Gross deferred tax assets                                                |  |      | 25,488,000  |      |   | 27,872,000  |  
|Deferred tax
 liability                                                  |  |      | (38,000     | )    |   | (34,000     | )
|Net deferred
 taxes assets before FIN48 Reserve and valuation allowances |  |      | 25,450,000  |      |   | 27,838,000  |  
|FIN48 Reserve                                                            |  |      | (727,000    | )    |   | (597,000    | )
|Less valuation allowances                                                |  |      | (14,388,000 | )    |   | (14,075,000 | )
|Net deferred
 tax asset / (liability)                                    |  | $    | 10,335,000  |      | $ | 13,166,000  |  
|                                                                         |  |      |             |      |   |             |  
|Deferred
 taxes recorded on the balance sheet:                           |  |      |             |      |   |             |  
|Net deferred tax assets / (liabilities) 
 current                       |  | $    | 4,500,000   |      | $ | 2,680,000   |  
|Net deferred tax assets / (liabilities) 
 long-term                     |  |      | 5,835,000   |      |   | 10,486,000  |  
|Net deferred
 tax assets                                                 |  | $    | 10,335,000  |      | $ | 13,166,000  |  

58

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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. For the year ended December 31,
2008, based upon the Companys assessment of all available evidence, including
the 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 was more likely than not that the Company would 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. To determine the amount of
the reduction in the valuation allowance, the Company used a discounted
projection of its revenue and income for the years ending December 31, 2009 through
2013, 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 at December 31, 2008, was based on the Companys projected discounted
taxable income. The Company continues 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, 2009 and 2008,
the valuation allowance was $14,388,000 and $14,075,000, respectively. Of these
amounts, $530,000 as of December 31, 2008 was attributable to increases in the
net operating loss carry forwards resulting from the exercise of stock options.
This amount 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
$313,000, ($14,997,000) and $1,360,000 for the years ended December 31, 2009,
2008 and 2007, respectively. For the year ended December 31, 2009 the Company
recorded a stock option tax deduction of $1,062,000, which will be recorded
against additional paid-in capital at the time at which it reduces taxes
payable.

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

|                                            |  |      |      |      |  |        |    |  |       |   
|------------------------------------------- |  | ---- | ---- | ---- |  | ------ | -- |  | ----- | --
|                                            |  | 2009 |      | 2008 |  | 2007   |   
|                                            |  |      |      |      |  |        |    |  |       |   
|Tax at
 statutory rate                      |  |      | 34.0 | %    |  | 34.0   | %  |  | (34.0 | )%
|Permanent
 differences                      |  |      | (1.4 | )    |  | 9.6    |    |  | 13.5  |   
|State income
 taxes, net of federal benefit |  |      | 4.5  |      |  | 3.7    |    |  | (3.7  | ) 
|Change in
 valuation reserve                |  |      | 6.2  |      |  | (476.4 | )  |  | 33.6  |   
|R&D
 credits generated                      |  |      | (6.1 | )    |  | (18.1  | )  |  | (24.8 | ) 
|FIN48
 reserve                              |  |      | 1.6  |      |  | 2.8    |    |  | 12.7  |   
|Change in
 effective deferred tax rate      |  |      | (2.1 | )    |  | 25.4   |    |  | 4.0   |   
|Other
 adjustments                          |  |      | (2.6 | )    |  | 2.0    |    |  | 5.5   |   
|Effective
 income tax rate                  |  |      | 34.1 | %    |  | (417.0 | )% |  | 6.8   | % 
|                                            |  |      |      |      |  |        |    |  |       |   
|                                            |  | 2009 |      | 2008 |  | 2007   |   
|                                            |  |      |      |      |  |        |    |  |       |   
|Current
 taxes                              |  |      | (0.1 | )%   |  | 3.7    | %  |  | (3.7  | )%
|Deferred
 taxes                             |  |      | 34.2 |      |  | 1.3    |    |  | 10.5  |   
|Benefit from
 release of valuation reserve  |  |      |     |      |  | (422.0 | )  |  |      |   
|Effective
 income tax rate                  |  |      | 34.1 | %    |  | (417.0 | )% |  | 6.8   | % 

59

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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,
2009, the Company had reserved 5,900,000 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. 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. Vested and unexercised options are canceled
three-months 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.

During 2007 to
2009, 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, 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  |  |   |           | 
|Shares reserved                   |  |                                                                         | 500,000   |                            |  |                |   |                                    |            |                             |   |      |  |   |           | 
|Granted                           |  |                                                                         | (60,000   | )                          |  | 60,000          |   |                                    | 6.39        |                             |   | 6.39  |  |   |           | 
|Exercised                         |  |                                                                         |          |                            |  | (248,000        | ) |                                    | 0.81 6.74  |                             |   | 4.61  |  |   |           | 
|Forfeited                         |  |                                                                         | 2,000     |                            |  | (2,000          | ) |                                    | 6.00 11.62 |                             |   | 10.22 |  |   |           | 
|Expired                           |  |                                                                         | 26,000    |                            |  | (26,000         | ) |                                    | 9.46 11.62 |                             |   | 11.55 |  |   |           | 
|Balance at
 December 31, 2009     |  |                                                                         | 3,424,000 |                            |  | 1,030,000       |   | $                                  | 0.78$10.89 |                             | $ | 6.06  |  | $ | 2,849,000 | 
|Exercisable
 at December 31, 2009 |  |                                                                         |           |                            |  | 1,010,000       |   |                                    |             |                             | $ | 6.05  |  | $ | 2,809,000 | 

The weighted average remaining contractual term of options exercisable
at December 31, 2009, was 4.3 years. The total intrinsic value of options
exercised during fiscal 2009, 2008 and 2007, was $879,000, $909,000 and
$903,000, respectively.

60

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8. Stock Options and
Restricted Shares (Continued)

The following
table summarizes information about stock options outstanding at December 31,
2009:

|                          |  |                                        |  |                                                 |  |                                   |  |                                        |      |                                   |  |           |  |   |      | 
|------------------------- |  | -------------------------------------- |  | ----------------------------------------------- |  | --------------------------------- |  | -------------------------------------- | ---- | --------------------------------- |  | --------- |  | - | ---- | 
|                          |  | Options
 Outstanding                   |  | Options
 Exercisable                            | 
|Range of
 Exercise Prices |  | Outstanding
 as of
 December 31,
 2009 |  | Weighted
 Average
 Remaining
 Contractual
 Life |  | Weighted
 Average
 Exercise Price |  | Exercisable
 as of
 December 31,
 2009 |      | Weighted
 Average
 Exercise Price | 
|                          |  |                                        |  |                                                 |  |                                   |  |                                        |      |                                   |  |           |  |   |      | 
|$0.78$0.84               |  |                                        |  | 243,000                                         |  | 2.4                               |  | $                                      | 0.84 |                                   |  | 243,000   |  | $ | 0.84 | 
|0.85 2.51                |  |                                        |  | 76,000                                          |  | 1.9                               |  |                                        | 2.39 |                                   |  | 76,000    |  |   | 2.39 | 
|2.52 6.50                |  |                                        |  | 128,000                                         |  | 8.4                               |  |                                        | 6.34 |                                   |  | 108,000   |  |   | 6.33 | 
|6.51 7.48                |  |                                        |  | 187,000                                         |  | 2.9                               |  |                                        | 6.93 |                                   |  | 187,000   |  |   | 6.93 | 
|7.49 9.27                |  |                                        |  | 73,000                                          |  | 5.9                               |  |                                        | 8.23 |                                   |  | 73,000    |  |   | 8.23 | 
|9.28 10.89               |  |                                        |  | 323,000                                         |  | 5.2                               |  |                                        | 9.72 |                                   |  | 323,000   |  |   | 9.72 | 
|                          |  |                                        |  | 1,030,000                                       |  | 4.3                               |  | $                                      | 6.06 |                                   |  | 1,010,000 |  | $ | 6.05 | 

As of December 31, 2009,
there was $12,000 of total unrecognized compensation costs related to the
outstanding stock options, which is expected to be recognized over a weighted
average period of 0.18 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. These shareholders do not have the
ability to sell, transfer or otherwise encumber the restricted share awards
until they fully vest. During 2009, 2008 and 2007 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, 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  | 
|Granted                       |  |                     | 211,000  |                                           |   | 9.14  | 
|Vested                        |  |                     | (106,000 | )                                         |   | 8.86  | 
|Forfeited                     |  |                     | (30,000  | )                                         |   | 8.15  | 
|Expired                       |  |                     |         |                                           |   |      | 
|Balance at
 December 31, 2009 |  |                     | 445,000  |                                           | $ | 8.07  | 

61

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8. Stock Options and
Restricted Shares (Continued)

As of December
31, 2009, there was $1,112,000 of total unrecognized compensation costs related
to the outstanding restricted shares, which is expected to be recognized over a
weighted average period of 1.22 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 2,800,000 shares.

Deferred Compensation

In 2009, 2008,
and 2007, the Company recorded $-0-, $-0- and $21,000, 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 $-0-, $9,000 and $26,000 for the years ended December 31, 2009, 2008, and
2007, respectively.

9. Employee Stock
Purchase Plan

The Company
has an Employee Stock Purchase Plan (the Purchase Plan) under which 2,100,000
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 July 2010. In fiscal 2009, 2008 and 2007, 140,800 shares, 133,300
shares, and 102,200 shares, respectively, were issued under the Purchase Plan.
At December 31, 2009, 851,000 shares were available for issuance under the
Purchase Plan.

As of December 31, 2009,
there was $98,000 of total unrecognized compensation costs related to the
Purchase Plan, which is expected to be recognized over a weighted average
period of 0.24 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 $157,000, $117,000 and $144,000 for
contributions to the Plan for the years ended December 31, 2009, 2008, and
2007, 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.

No customer
represented more than 10% of total revenue for any year ended December 31,
2009, 2008 and 2007.

62

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11. Concentrations of
Credit and Other Risks (Continued)

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, 2009 and 2008. 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:

|         |  |      |   |      |    |      |  |    |   | 
|-------- |  | ---- | - | ---- | -- | ---- |  | -- | - | 
|         |  | 2009 |   | 2008 |    | 2007 | 
|         |  |      |   |      |    |      |  |    |   | 
|Domestic |  | 87   | % |      | 87 | %    |  | 87 | % | 
|Foreign  |  | 13   |   |      | 13 |      |  | 13 |   | 

12. Related Party
Activity

During the
years ended December 31, 2009, 2008 and 2007, the Company sold $458,000,
$495,000 and $489,000, respectively, of product to a company of which a board
member of the Company is an officer. As of December 31, 2009 and 2008, the
Company had an accounts receivable balance due of $103,000 and $47,000,
respectively, from this related party. In addition, the Company purchases
product from this related party and during the years ended December 31, 2009,
2008 and 2007 the Company purchased $15,000, $16,000 and $24,000, respectively,
of product from this related party. As of December 31, 2009 and 2008, the
Company had an accounts payable balance due of $-0- to this related party.

In July 2008
the Company began utilizing the consulting services from a company owned by a
board member. During the years ended December 31, 2009 and 2008, the Company
utilized services in the amount of $354,000 and $170,000, respectively, from
this vendor. At December 31, 2009 and 2008, the Company had an accounts payable
balance due of $25,000 and $68,000 to this related party.

In July 2009
the Company began utilizing development consulting services from a company
owned by the spouse of a board member. During the year ended December 31, 2009
the Company utilized services in the amount of $55,000 from this vendor. At
December 31, 2009 the Company had an accounts payable balance due of $4,000 to
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 Hemostat 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.

63

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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. The
jury concluded there was no willful infringement by the Company and therefore
the award was not subject to treble damages or attorneys fees. 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. 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 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 United States 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.

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 counter-claims 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.

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14. Commitments and
Contingencies (Continued)

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. Marine Polymer did not appeal the Courts rejection of its
counter-claims against the Company. On February 4, 2009, oral arguments by both
parties on Marine Polymers appeal were heard by the U.S. First Circuit Court
of Appeals. On December 23, 2009, the U.S. First Circuit
Court of Appeals affirmed the judgment against Marine Polymer for product
disparagement. As a result, the permanent injunction issued at the conclusion
of the trial will remain in effect, prohibiting Marine Polymer and its
representatives from making, publishing or disseminating certain disparaging
statements concerning the safety of our D-Stat products. Addressing the jurys
award of $4.5 million in damages, the Court determined that, due to differences
in opinion among the judges, the Company could either accept a $2.7 million
award of damages (plus interest) or insist upon a new trial limited to the
issue of determining the reasonable amount of damages. The Company has accepted
the $2.7 million award of damages plus interest, received $3.56 million
from Marine Polymer on January 22, 2010, and will record the amount as
litigation gain during the first quarter of 2010 (See Note 16).

VNUS®Medical
Technologies (acquired by Covidien) Litigation

On October 13, 2005, the
Company was named as one of three defendants in an intellectual property
lawsuit brought by VNUS® 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.

AngioDynamics, Inc. Litigation

On July 29,
2009 AngioDynamics, Inc. (AngioDynamics) filed a lawsuit against the Company in
the U.S. District Court for the District of Delaware, alleging that the Company
has infringed U.S. Patent No. 7,273,478 and U.S. Patent No. 7,559,329. Specifically, AngioDynamics alleges that
doctors using the Companys Bright Tip fibers and procedure kits are using the
methods claimed in those patents, and accuses the Company of inducing and
contributing to infringement. AngioDynamics has requested injunctive
relief and compensatory damages. On December 1, 2009 the Company filed its
answer, a counterclaim, and a motion to transfer the case to the U.S. District
Court for the District of Minnesota.

The Company has also filed
an inter
partes request for reexamination of both the 478 and 329 patents
with the United States Patent Office. The Patent Office granted the inter partes
requests for reexamination for both the 478 and 329 patents. The Company
expects the reexamination process for each patent will take at least three
years to conclude. On January 27, 2010, the Company filed a motion with the
U.S. District Court for the District of Delaware to stay all proceedings in the
litigation pending the outcome of the inter partes reexaminations.

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14. Commitments and
Contingencies (Continued)

From time to time, the Company is involved in additional 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.

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. In 2009 King suspended further development of all Thrombi-Paste
products. The unamortized license fee was $4,945,000, $5,649,000 and $6,353,000
at December 31, 2009, 2008 and 2007, respectively. The amortization of license
fee was $704,000, $704,000 and $647,000 for the years ended December 31, 2009,
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 500,000 Euros from Nicolai, GmbH. which was
deferred and is being 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 $472,000 and
$617,000 at December 31, 2009 and 2008, respectively. The amortization of
license fee was $145,000 and $114,000 for the year ended December 31, 2009 and
2008, respectively.

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

|                                     |  |                 |        |                 |   |                 |  |                 |        |   |   |        | 
|------------------------------------ |  | --------------- | ------ | --------------- | - | --------------- |  | --------------- | ------ | - | - | ------ | 
|2009                                 |  | Fourth
 Quarter |        | Third 
 Quarter |   | Second
 Quarter |  | First 
 Quarter |       
|Revenue:                             |  |                 |        |                 |   |                 |  |                 |        |   |   |        | 
|Product                              |  | $               | 17,712 |                 | $ | 16,817          |  | $               | 16,781 |   | $ | 15,416 | 
|License and collaboration            |  |                 | 510    |                 |   | 411             |  |                 | 385    |   |   | 395    | 
|Total revenue                        |  |                 | 18,222 |                 |   | 17,228          |  |                 | 17,166 |   |   | 15,811 | 
|                                     |  |                 |        |                 |   |                 |  |                 |        |   |   |        | 
|Selected
 costs and expenses:        |  |                 |        |                 |   |                 |  |                 |        |   |   |        | 
|Product                              |  |                 | 6,219  |                 |   | 5,718           |  |                 | 5,765  |   |   | 5,215  | 
|Collaboration                        |  |                 | 295    |                 |   | 199             |  |                 | 173    |   |   | 183    | 
|Total selected costs and expenses:   |  |                 | 6,514  |                 |   | 5,917           |  |                 | 5,938  |   |   | 5,398  | 
|                                     |  |                 |        |                 |   |                 |  |                 |        |   |   |        | 
|Operating
 income (loss)             |  |                 | 2,228  |                 |   | 2,178           |  |                 | 2,247  |   |   | 1,513  | 
|                                     |  |                 |        |                 |   |                 |  |                 |        |   |   |        | 
|Net income
 (loss)                   |  |                 | 1,623  |                 |   | 1,431           |  |                 | 1,386  |   |   | 938    | 
|                                     |  |                 |        |                 |   |                 |  |                 |        |   |   |        | 
|Basic net
 income (loss) per share   |  | $               | 0.10   |                 | $ | 0.09            |  | $               | 0.09   |   | $ | 0.06   | 
|Diluted net
 income (loss) per share |  | $               | 0.10   |                 | $ | 0.09            |  | $               | 0.09   |   | $ | 0.06   | 
|                                     |  |                 |        |                 |   |                 |  |                 |        |   |   |        | 
|2008                                 |  |                 |        |                 |   |                 |  |                 |        |   |   |        | 
|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   | 

16. Subsequent Event

On January 22, 2010 the Company
received $3.56 million dollars as payment in full for the judgment against
Marine Polymer in the lawsuit initiated by the Company for product
disparagement and false advertising which was affirmed by the U.S. First
Circuit Court of Appeals on December
23, 2009. The Company will record the $3.56 million as a litigation gain in the
first quarter of 2010.

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