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

# FORM 10-K

(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, 2003

# OR

|[  ] |  | 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

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

|                         |                                  
|------------------------ | ---------------------------------
|Minnesota                | 41-1859679                       
|(State of Incorporation) | (IRS Employer Identification No.)

6464 Sycamore CourtMinneapolis, Minnesota 55369(Address of Principal Executive Offices)

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

Securities registered
pursuant to Section 12(b) of the Act: NoneSecurities
registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share___________________________

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

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

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, 2003 was $21,638,700.

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

As of February 13, 2004, the number
of shares outstanding of the registrants common stock was 12,998,770.

DOCUMENTS INCORPORATED
BY REFERENCE

Portions of the Registrants Proxy
Statement for its 2004 Annual Meeting of Shareholders to be held on April 22, 2004 are
incorporated by reference in Part III of this Annual Report on Form 10-K.



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PART I

ITEM 1. BUSINESS

Overview

We
are a medical device company focused on bringing clinically advanced solutions to
interventional cardiologists and interventional radiologists worldwide. Our current
product line consists of the following medical devices:

| |    Duettsealing device, used to seal the puncture site following
catheterization procedures,    D-Stat® Flowable hemostat, a thick, yet
flowable, mixture used to control bleeding,    D-Stat Dry hemostatic
bandage, a topical pad with a bandage used to control surface bleeding,   
D-Stat Radial hemostat band, a topical pad with a compression strap to
control bleeding at the wrist,    Vari-Lase® endovenous laser system, a
laser and procedure kit used for the treatment of varicose veins,   
Pronto extraction catheter, a mechanical system for the removal of soft
thrombus from arteries, and    Acolysis® ultrasound (international only),
a treatment for peripheral occlusive arterial disease.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

The
second product we developed and commercialized is the D-Stat Flowable hemostat, which we
began selling worldwide in February 2002. The D-Stat Flowable hemostat utilizes the
clinically proven procoagulant components of the Duett sealing device to provide a
powerful stop to active bleeding. The thick, yet flowable procoagulant controls active
bleeding by initiating the bodys own clotting mechanisms in the same manner as the
procoagulant included in our Duett sealing device. The D-Stat Flowable hemostat can be
clinically used in a number of medical procedures, and has substantial extension
market opportunities in other medical practice areas.

During
the second quarter of 2002 we acquired the Acolysis ultrasound thrombolysis system. The
Acolysis system uses ultrasound energy generated by the Acolysis controller that is
delivered intravascularly by the disposable Acolysis probe to lyse blood clots and
plaque. The Acolysis controller and probes are sold only in international markets, where
it has been sold principally for the treatment of peripheral vascular disease. Upon
completion of our acquisition and integration of the Acolysis business, we commenced
active international sales of the Acolysis probes through our existing international
distribution network in late 2002. In late 2003 we received CE mark approval to
internally manufacture Acolysis probes, which will allow broader international market
activities starting in 2004.

2

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In
the second half of 2003 we received regulatory clearance in the United States
for four new interventional medical devices: the D-Stat Dry, the D-Stat Radial,
the Vari-Lase and the Pronto. Our D-Stat Dry hemostatic bandage consists of our
proprietary hemostat which is lyohphilized (freeze-dried) into a gauze pad and
applied with an included adhesive bandage. The D-Stat Dry hemostatic bandage is
used to assist in the control of bleeding from vascular access sites in
conjunction with manual compression. Our D-Stat Radial hemostat band is a
version of our D-Stat Dry which includes a compression band for application
around the patients wrist. The D-Stat Radial hemostat band is designed to
be used following catheterizations using the radial artery in the wrist. Our
Vari-Lase endovenous laser products consist of a solid state diode laser console
and procedure kit and accessories which are used in the minimally-invasive
treatment of varicose veins. Our Pronto extraction catheter is a catheter and
syringe system for the mechanical removal of blood clots from arteries.

We
also have in development several additional products that leverage our existing
infrastructure to bring additional solutions to the interventional cardiologist and
interventional radiologist. Additional products that we expect to gain regulatory
clearance and market launch before the end of 2004 include several new versions of our
D-Stat Dry hemostatic bandage and a new device for the measurement of stenosis of the
aortic valve of the heart.

Interventional Cardiology and
Interventional Radiology Industry Background

Over
60 million Americans have one or more types of cardiovascular diseasediseases of
the heart and blood vessels. Cardiovascular disease is the number one cause of death in
the United States and is replacing infectious disease as the worlds pre-eminent
health risk. Advances in medicine have enabled physicians to perform an increasing number
of diagnostic and therapeutic treatments of cardiovascular disease using minimally
invasive methods, such as catheters placed inside the arteries, instead of highly
invasive open surgery. Cardiologists and radiologists use diagnostic procedures, such as
angiography, to confirm, and interventional procedures, such as angioplasty and stenting,
to treat, diseases of the coronary and peripheral arteries. Based on industry statistics,
we estimate that cardiologists and radiologists performed over 9 million diagnostic and
interventional catheterization procedures worldwide in 2003. Oftentimes, these procedures
are performed to remove blood clots or plaque which have been generated and deposited
inside the patients artery and are an impediment to normal blood flow. The number
of catheterization procedures performed is expected to grow by more than 5% each year for
the next three years as the incidence of cardiovascular disease continues to increase.
The overall interventional medical device market in 2003 exceeded $5 billion worldwide.

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

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

Until
1996, manual compression was used following virtually all catheterization procedures. In
late 1995, the first vascular sealing device which did not rely on compression was
introduced in the United States.

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In addition to the Duett sealing
device, four invasive sealing devices have received FDA approval and are currently being
marketed around the world. In aggregate, over $320 million of the five FDA-approved
invasive sealing devices were sold worldwide in 2003 compared to less than $20 million in
1996. In addition to invasive (below the skin surface) sealing devices, starting in 2000,
non-invasive patches have begun to be used as an assistance to manual
compression following catheterizations. Non-invasive patches are used by physicians who
(principally due to cost, complexity or risk of complications) do not wish to use
invasive sealing devices, and for those patients who are contra-indicated for an invasive
sealing device. Based on the number of catheterization procedures performed annually by
cardiologists and radiologists, industry sources report that the total market opportunity
for vascular sealing devices (invasive and non-invasive) is more than $1 billion.
Accordingly, the market opportunity for vascular sealing devices is currently
approximately 20% penetrated.

Duett Sealing Device

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

We
commenced sales of a new version of our Duett sealing device, the Diagnostic Duett
sealing device, for a subset of catheterization patients in the fourth quarter of 2001.
The Diagnostic Duett is tailored specifically for treating diagnostic patients. Because
the Duett sealing device is a one-size-fits-all device, the procoagulant is dosed
appropriately for the most challenging catheterization patients. We developed the
Diagnostic Duett with a lower dose of procoagulant that is tailored specifically for the
less-challenging diagnostic patients where substantial blood-thinning drugs are less
frequently used. All other components of the Diagnostic Duett, including the balloon
catheter, are identical to the original Duett sealing device. This results in the
Diagnostic Duett having identical deployment steps, but being less expensive and yet
fully effective for the over 2.5 million diagnostic procedures that occur each year in
the United States. In July 2002 we launched the next generation Pro line of
the Duett sealing device. The Pro line enhances the Duett catheter by improving its
robustness and simplifying the device deployment steps.

D-Stat Flowable Hemostat

Our
second product, the D-Stat Flowable hemostat, is a blood clotting material that can be
delivered topically and into voids and open spaces to control active bleeding. The
D-Stat Flowable offers the advantage of being thick to maintain its position, yet easily
deliverable. The D-Stat Flowable consists of the same collagen, thrombin and diluent
components as the Duett sealing device, which has been proven effective in controlling
bleeding from aggressive arterial puncture sites. After a simple reconstitution step, the
D-Stat Flowable can be applied directly to a wide variety of bleeding surfaces
included applicator tips. Since the D-Stat Flowable is applied locally, no
special catheter delivery system is required. The D-Stat Flowable is shelf stable and can
be prepared up to three hours before use.

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

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the thick consistency and extremely
flowable delivery that is preferred by the interventional physician in these
opportunities.

We
commenced sales of the D-Stat Flowable worldwide in the first quarter of 2002. Currently,
the approved clinical indications for the D-Stat Flowable are limited to topical bleeding
and blood oozing following percutaneous procedures. We believe these
indications are but a small fraction of the total potential market for the D-Stat
Flowable. We currently are undertaking a clinical study of the use of the D-Stat Flowable
in the hemostasis of prepectoral pockets created in pacemaker and defribrillator
implantations. We expect that enrollment in this Pocket Protector clinical
study will be completed and submitted for FDA approval by the middle of 2004. We estimate
that the U.S. market opportunity for this prepectoral pocket indication is greater than
100,000 procedures (or $10 million) annually. Following completion of the Pocket
Protector clinical study, we expect to perform clinical studies on the use of D-Stat
Flowable to seal following breast biopsy and liver biopsy procedures, each of which we
believe can match or exceed the prepectoral pocket market opportunity for D-Stat
Flowable.

Acolysis Ultrasound Thrombolysis
System

Our
third product, the Acolysis ultrasound thrombolysis system, uses high energy, low
frequency ultrasound to lyse thrombus into subcapillary particles without damaging vessel
walls. The therapeutic principle of the Acolysis system is to generate ultrasound
thrombolysis by the selective disruption of the fibrin matrix of the thrombus. Cavitation
produces subcapillary-sized particles, resulting in a debulking of the arterial lesion.
The first application of the Acolysis product is to treat chronic occlusions in
peripheral arteries. Peripheral vascular disease currently affects over 8 million people
worldwide, with limited effective treatment options. We believe the Acolysis product
represents a new approach in both therapy and technology, and initial clinical experience
and one-year follow-up with the product has been favorable.

Our international
sales efforts on the Acolysis product began in 2002 on a limited basis. In the fourth
quarter of 2003 we received CE mark approval for our internal manufacturing of the
Acolysis probe, which will allow us to broaden our international marketing activities in
2004. We are in the process of planning and structuring a clinical study in the U.S. to
study the effectiveness of the use of the Acolysis system to open chronic peripheral
occlusions, with the study not expected to be completed before 2006.

D-Stat Dry and D-Stat Radial
Hemostat Products

In
September 2003 we received regulatory clearance and commenced sales of our D-Stat Dry
hemostatic bandage in the United States and international markets. The D-Stat Dry
hemostatic bandage is a version of our proprietary blood clotting substance that is
lyophilized (freeze-dried) into a gauze pad, combined with an adhesive bandage for
application. The D-Stat Dry is used as an assistance for manual compression to manage
bleeding after catheterization procedures. We believe that the market for a hemostatic
pad in this indication has grown substantially since the first competitive patch was
introduced in 2000, with a market size greater than $30 million in 2003. Like the D-Stat
Flowable, we believe that the D-Stat Dry has many potential uses beyond this initial
application, and we are currently exploring several opportunities and variations of the
D-Stat Dry for use in trauma, dialysis and other medial areas. We are exploring corporate
relationships for most of these opportunities for the D-Stat Dry.

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

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Vari-Lase Endovenous Laser Products

Our
Vari-Lase endovenous laser products consist of a laser console, procedure kits and
accessories used in the treatment of reflux of the great saphenous vein, commonly
referred to as varicose veins. More than one million people in the U.S. seek treatment
each year for varicose veins. Left untreated, varicose veins can result in serious
clinical consequences, including limited mobility and venous ulcers. Historically, an
invasive surgical procedure known as vein stripping was the only treatment for severe
varicose veins. While vein stripping is still performed on over 100,000 patients each
year in the United States, a new non-surgical procedure using endovenous laser energy to
treat and close the diseased vein has emerged since 2002 as a preferred alternative.
Recent clinical data on endovenous laser therapy has demonstrated excellent clinical
results and outstanding patient satisfaction.

The
first product we launched in our Vari-Lase product line was our Vari-Lase procedure kit
in July 2003 in the United States. Our procedure kit is custom-designed for the
endovenous procedure, with features supporting ease-of-use and safety, and is compatible
with the competitive laser consoles already in use for this procedure. In December 2003
we received FDA clearance for our laser console, which we have manufactured to our
specifications by MedArt Corporation, a subsidiary of Asah Medico, a leading
Denmark-based medical laser manufacturer. To complete our Vari-Lase product line, we sell
micro-introducers and guidewires which are used as accessory items in the endovenous
laser procedure as well as other interventional medical procedures.

Pronto Extraction Catheter

Our
Pronto product consists of an extraction catheter with a proprietary distal tip and a
large extraction lumen that can be delivered into arteries to mechanically remove blood
clots. 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.

Business Strategy

Our
primary objective is to establish ourselves as a leading supplier of clinically superior
medical devices for substantial opportunities within interventional medicine. Starting
with our Duett sealing device in the vascular sealing device market, the key steps in
achieving our primary objective are the following:

| |  |  | Maintain
and Improve our Clinically-Oriented Direct Sales Force in the United States.During
the third quarter of 2000 we commenced sales of our Duett sealing device in the United
States through a direct sales force that includes clinical specialists who train
interventional cardiologists, radiologists and catheterization laboratory administrators
on the use of our products. We believe that effective training is a key factor in
promoting use of interventional medical devices, and we have created and will continue to
work to improve an in-the-field training program for the use of our products.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Introduce
our New Products to Our Existing Market.In the second half of 2003 we received
clearance for a total of four new products to be sold in the United States through our
existing direct sales force to our existing markets. We believe that each of these
products has the potential to generate a material level of sales during 2004 and expand
in 2005 and beyond.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | Develop
Future Devices 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. Our research and development team is working on additional
configurations of the D-Stat Dry hemostatic bandage and a new device for the precise
measurement of aortic stenosis which we believe we can bring to the United States market
before the end of 2004.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Explore
Corporate Relationships to Augment our Direct Sales Force. For markets for our
products beyond the interventional physician 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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Sales, Marketing and Distribution

In
the third quarter of 2000 we commenced sales of our Duett sealing device in the United
States through our direct sales organization. As of December 31, 2003, our direct sales
force consisted of approximately 40 employees. We believe that the majority of
interventional catheterization procedures in the United States are performed in high
volume catheterization laboratories, and that these institutions can be served by our
focused direct sales force. We also believe that our sales force are able to sell each of
our new products to the same customer base.

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

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

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

Substantially
all of our revenues from inception until our FDA approval on June 22, 2000 were derived
from sales to international distributors, primarily in Europe, none of which is
affiliated with us. Sales in international markets constituted 13%, 11%, 10%, 33% and 93%
of our net sales for the years ended December 31, 2003, 2002, 2001, 2000 and 1999.

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New Product Development

Our
research and development staff is currently focused on developing new products to sell to
our existing customer base through our direct sales force and on developing next
generation versions of our existing products. We incurred expenses of $3,670,935 in 2003,
$3,227,538 in 2002 and $4,123,883 in 2001 for research and development activities. To
further reduce our costs, our research and development group continues to develop
in-house capabilities to manufacture some of the components currently produced by outside
vendors.

We
are in the process of developing several new products and product line extensions of our
current products. We currently are developing several new versions of our D-Stat Dry
hemostatic bandage for use in interventional medicine and in other medical areas such as
trauma and dialysis. We also have an active program for the development of a new device
for the precise measurement of aortic stenosis.

We
are also working on next generation versions of the Duett sealing device. We have
developed and performed pre-clinical testing of the Mechanical Duett, a concept that
utilizes an immediate and complete mechanical seal of the arterial puncture to obtain
hemostasis. Additional development of this new concept is necessary before it proceeds
into clinical studies.

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

Manufacturing

We
manufacture our products in our facility in a suburb of Minneapolis, Minnesota. The
catheter manufacturing and packaging processes occur under a controlled clean room
environment. Our manufacturing facility and processes were certified in July 1998 as
compliant with the European Communitys EN 46001 standards and were audited in
September 1999 and June 2000 for compliance with the FDAs quality systems
regulations with no deficiencies noted. Upon expiration of our prior lease, in March 2003
we moved to a new facility, also located in a suburb of Minneapolis, Minnesota. FDA
approved our new facility in May 2003.

We
purchase components from various suppliers and rely on single sources for several parts of
the Duett sealing device and D-Stat flowable hemostat. In September 1998, we entered into
a ten year, sole-source, supply agreement with our collagen supplier, Davol Inc., that
provides for a fixed price based on volume purchases which is adjusted annually for
increases in the Department of Labors employers cost index. In June 1999, we
entered into a five year, sole-source, supply agreement with our thrombin supplier,
GenTrac, Inc., a subsidiary of King Pharmaceuticals, Inc., that provides for a fixed price
with a price adjustment formula based on increased costs and wholesale price increases.
Our agreement with GenTrac, Inc. expires in May 2005. To date, we have not experienced any
significant adverse effects resulting from shortages of components.

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

Competition

Competition
in the interventional medical device industry is intense and dominated by very large and
experienced companies such as Medtronic, Inc., Abbott Laboratories and Boston Scientific.
We compete on

8

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the basis of our clinically
differentiated products and focused opportunities within this interventional medical
device market.

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

| |  |  | The
VasoSeal® device, manufactured and marketed by Datascope Corp., seals the
tissue tract by placing a dry collagen plug in the tissue tract adjacent to the puncture
in the artery.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | The
Angio-Seal® device, sold by the Daig division of St. Jude Medical, Inc.
and developed by Kensey Nash Corporation, seals the puncture site through the use of a
collagen plug on the outside of the artery connected by a suture to a biodegradable
anchor which is inserted into the artery.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | The
Closer device, sold by Perclose, Inc., a subsidiary of Abbott Laboratories, seals
the puncture site through the use of a mechanical device that enables a physician to
perform a minimally invasive replication of open surgery.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Topical
patches and pads, which have recently been introduced to the market, are designed to
treat bleeding at arterial puncture sites. Our D-Stat Dry hemostatic bandage competes in
this market segment. These patches are applied directly over the puncture site and held
in place with adjunctive manual compression for a period of 10-20 minutes. These patches
include:

| |   The Syvek(TM)Patch, manufactured and marketed by Marine Polymer Technologies, Inc.
  The Closur-P.A.D.(TM), manufactured by Scion Cardiovascular and distributed by
Medtronic, Inc.   The Chito-Seal(TM), distributed by Abbott Vascular, Inc. a
division of Abbott Laboratories
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
Acolysis therapeutic ultrasound system and the Pronto extraction catheter compete, and
are expected to compete, in the highly competitive market segment for removal of thrombus
and plaque from the arterial system. There are many companies that are selling or have
developed products in this segment, including Possis Medical, Medtronic, Boston
Scientific and ev3.

We
are aware of four companies that sell a product for the endovenous laser treatment of
varicose veins. These companies are AngioDynamics (a subsidiary of EZ-EM), biolitec,
Dornier MedTech and Diomed. Each of these companys products contain the same basic
components for the therapy but differ in procedural training, custom-designed features
and support.

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

Regulatory Requirements

United States

Our
products are regulated in the United States as medical devices by the FDA under the
Federal Food, Drug and CosmeticAct. 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

9

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general controls such as labeling,
adherence to good manufacturing practices and maintenance of product complaint records,
but are usually exempt from premarket notification requirements. Class II devices are
subject to the same general controls and also are subject to special controls such as
performance standards, and FDA guidelines, and may also require clinical testing prior to
approval. Class III devices are subject to the highest level of controls because they are
used in life-sustaining or life-supporting implantable devices. Class III devices require
rigorous clinical testing prior to their approval, and generally require a premarket
approval (PMA) application prior to their sale.

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

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

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

Our
Duett sealing device is classified as a Class III device and is subject to the IDE
requirements. In May 1997, the FDA determined that the review of the Duett sealing device
would be delegated to the Center for Devices and Radiological Health area of the FDA,
with a consulting review by the Center for Biologic Evaluation and Research. During 1998
and 1999, we received approval of our IDE application to start our feasibility clinical
study, filed our IDE Supplement to begin our multi-center clinical study, completed the
SEAL multi-center clinical study and filed our PMA application with the FDA. In September
1999 our manufacturing facility was audited by the FDA, with no deficiencies or
non-compliances noted by the inspector. In December 1999, we received the FDAs
review letter of our PMA application, and we submitted an amendment to our PMA to the FDA
in January 2000. On June 22, 2000, we received approval from the FDA of our PMA
application to sell the Duett sealing device in the United States.

Our
D-Stat Flowable, D-Stat Dry, D-Stat Radial, Pronto and Vari-Lase products also are
regulated in the United States as medical devices by the FDA and required clearance of
our 510(k) notification by the FDA prior to being sold in the United States. Each of
these devices was the subject of a 510(k) notification which was determined to be substantially
equivalent to a legally marketed predicate device by the FDA, thereby allowing
commercial marketing in the United States. The D-Stat Flowable received clearance in
February 2002, while the other four products received clearance during the second half of
2003.

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,

10

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issue a recall, stop future
violations and assess civil and criminal penalties against us, our officers and our
employees.

International

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

| |   D-Stat Flowable hemostat  November 2001
  Pronto extraction catheter  June 2003
  D-Stat Dry and D-Stat Radial  September 2003
  Vari-Lase endovenous laser procedure kit  December 2003
  Acolysis probe internal manufacturing  November
2003
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Third Party Reimbursement

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

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

Patents and Intellectual Property

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

11

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and method and which expires in May
2013, three United States patents pending and an international patent application pending
which designated numerous foreign countries and regions.

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

The
interventional medical device market in general, and the vascular sealing device and
endovenous laser therapy fields in particular, are characterized by frequent and
substantial intellectual property litigation. Each of the vascular sealing products
currently on the U.S. market, including our Duett sealing device, has been subject to
infringement litigation. (See Legal Proceedings in Item 3 of Part I of this
Form 10-K) In addition, two of our competitors in the endovenous laser therapy market
(AngioDynamics and Diomed) are currently involved in intellectual property litigation.
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 filed in the future,
regardless of the merits of the complaint, could divert the attention of our technical
and management personnel away from the development and marketing of our products for
significant periods of time. The costs incurred to defend future claims could be
substantial and adversely affect us, even if we are ultimately successful.

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

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

Employees

As
of December 31, 2003, we had 128 full time employees. Of these employees, 35 were in
manufacturing activities, 62 were in sales and marketing activities, 8 were in research
and development activities, 14 were in regulatory, quality assurance and clinical
research activities and 9 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.

12

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Executive Officers of the Registrant

The
executive officers of the Company as of February 13, 2004 are as follows:

|Name              | Age | Position                                         
|----------------- | --- | -------------------------------------------------
|Howard Root       | 43  | Chief Executive Officer and Director             
|Michael Nagel     | 41  | Vice President of Sales & Marketing and Secretary
|Deborah Neymark   | 47  | Vice President of Regulatory Affairs             
|James Quackenbush | 45  | Vice President of Manufacturing                  
|James Hennen      | 31  | Chief Financial Officer                          

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

Michael
Nagel has served as our Vice President of Sales & Marketing since June
1997. Prior to joining us, Mr. Nagel was the Director of Sales & Marketing at
Quantech, Ltd., a developer of point of care medical diagnostic testing products, where
he worked since July 1996. From 1992 through July 1996, Mr. Nagel was the mid-west
division sales manager of B. Braun Cardiovascular, a manufacturer of cardiovascular
devices and catheters. From 1991 through 1992, Mr. Nagel was the Director of Worldwide
Sales for the Medical Products Division of Angeion Corporation, a manufacturer of
angioplasty accessories and pediatric catheters. Prior to 1991, Mr. Nagel performed a
variety of sales and marketing functions with Abbott Labs Diagnostic Division for over
five years. Mr. Nagel received his B.A. and M.B.A. degrees from the University of St.
Thomas.

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

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

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

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

13

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Available Information

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

# ITEM 2. PROPERTIES

Our
offices are in approximately 33,000 square feet of leased space in a suburb of
Minneapolis, Minnesota. These facilities include approximately 11,200 square feet used for
manufacturing activities, approximately 1,400 square feet used for research and laboratory
activities, with the remainder used for administrative offices. Our lease for these
facilities expires in September 2008. We believe that facility will be adequate to meet
our needs through at least the end of the lease period.

ITEM 3. LEGAL PROCEEDINGS

On
July 23, 1999, we were named as the defendant in a patent infringement lawsuit brought by
Datascope Corp. in the United States District Court for the District of Minnesota. The
complaint requested a judgment that our Duett sealing device infringes and, following FDA
approval will infringe, a United States patent held by Datascope and asks for relief in
the form of an injunction that would prevent us from selling our product in the United
States as well as an award of attorneys fees, costs and disbursements. On August
12, 1999, we filed our answer to this lawsuit and brought a counterclaim alleging unfair
competition and tortious interference. On August 20, 1999, we moved for summary judgement
to dismiss Datascopes claims. On March 15, 2000, the court granted summary judgment
dismissing all of Datascopes claims, subject to the right of Datascope to
recommence the litigation after our receipt of FDA approval of our Duett sealing device.
On July 12, 2000, after our receipt of FDA approval, Datascope recommenced this
litigation, alleging that the Duett sealing device infringes a United States patent held
by Datascope and requesting relief in the form of an injunction that would prevent us
from selling our product in the United States, damages caused by our alleged
infringement, and other costs, disbursements and attorneys fees. On November 26,
2002, we entered into an agreement that settled all existing intellectual property
litigation with Datascope Corporation. Under the terms of the Settlement Agreement,
Datascope granted us a non-exclusive license to its Janzen patents as they apply to all
current versions of the Duett sealing sevice, and to certain permitted future product
improvements. Datascope also has released us from any claim of patent infringement based
on past or future sales of the Duett sealing device. In exchange, we paid Datascope a
single lump sum of $3,750,000 in the fourth quarter of 2002.

On
July 3, 2000, we were named as the defendant in a patent infringement lawsuit brought by
the Daig division of St. Jude Medical in the United States District Court for the
District of Minnesota. The complaint requested a judgment that our Duett sealing device
infringes a series of four patents known as the Fowler patents held by St. Jude Medical
and asks for relief in the form of an injunction that would prevent us from selling our
Duett sealing device in the United States, damages caused by the manufacture and sale of
our product, and other costs, disbursements and attorneys fees. On July 12, 2001,
we entered into an agreement that settled all existing intellectual property litigation
with St. Jude Medical. Under the terms of the settlement agreement, we agreed to pay a
royalty of 2.5% of net sales of our Duett sealing device to St. Jude Medical, up to a
maximum amount over the remaining life of the St. Jude Fowler patents. In exchange, St.
Jude Medical granted to us a non-exclusive license to its Fowler patents and has released
us from any claim of patent infringement based on sales of our Duett sealing device. We
granted a non-exclusive cross-license to our Gershony patents to St. Jude Medical,
subject to a similar royalty payment if St. Jude Medical utilizes our Gershony patents in
any future device. Beginning on July 1, 2001, a royalty expense of 2.5% of net sales is
included in our cost of goods sold until the maximum royalty is attained.

14

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

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

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

No
matters were submitted to a vote of security holders during the fourth quarter ended
December 31, 2003.

15

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# PART II

ITEM 5. MARKET FOR REGISTRANTS
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

On
July 25, 2000, we sold 3,500,000 shares of our common stock, at an initial public
offering price of $12.00 per share, pursuant to a Registration Statement on Form S-1
(Registration No. 333-84089), which was declared effective by the Securities and Exchange
Commission on July 19, 2000. Our net proceeds from the offering were approximately $44.0
million. To date, we have spent approximately $22.7 million of the net proceeds to hire,
train and deploy a direct sales force in the United States, $4.1 million to settle the
St. Jude and Datascope litigation, $1.6 million to purchase the Acolysis System, $0.7
million for our stock repurchase program, $7.2 million for research and development of
new products and $4.8 million for general corporate purposes.

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

|               | High | Low
|-------------- | ---- | ---
|
|First Quarter  |      |    
|Second Quarter |      |    
|Third Quarter  |      |    
|Fourth Quarter |      |    
|
|First Quarter  |      |    
|Second Quarter |      |    
|Third Quarter  |      |    
|Fourth Quarter |      |    

Holders

As
of December 31, 2003, the Company had 161 shareholders of record. Such number of record
holders does not reflect shareholders who beneficially own common stock in nominee or
street name.

Dividends

The
Company has paid no cash dividends on its common stock, and it does not intend to pay
cash dividends on its common stock in the future.

ITEM 6. SELECTED FINANCIAL DATA

The
following selected financial data as of December 31, 2003 and 2002 and for the three
years ended December 31, 2003, 2002 and 2001 are derived from, and should be read
together with, our financial statements included elsewhere in this Form 10-K. The
following selected financial data as of December 31, 2001, 2000 and 1999 and for the
fiscal years ended December 31, 2000 and 1999 are derived from financial statements not
included herein. The information set forth below should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of Operations, the
Financial Statements and Notes thereto and other financial information included elsewhere
in this Form 10-K.

16

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|                                     | Year Ended December 31,
|------------------------------------ | -----------------------
|
|
|Statements of Operations Data:       |                        
|Net sales                            |                        
|Cost of sales                        |                        
|                                     |                        
|Gross profit                         |                        
|Operating expenses:                  |                        
|Research and development             |                        
|Clinical and regulatory              |                        
|Sales and marketing                  |                        
|General and administrative           |                        
|Legal settlement                     |                        
|Amortization of purchased technology |                        
|                                     |                        
|Total operating expenses             |                        
|                                     |                        
|Operating loss                       |                        
|Interest income                      |                        
|                                     |                        
|Net loss                             |                        
|                                     |                        
|Net loss per common share -          |                        
|Basic and diluted                    |                        
|Weighted average number of common    |                        
|shares outstanding                   |                        

|                                      | As of December 31,
|------------------------------------- | ------------------
|
|
|Balance Sheet Data:                   |                   
|Cash, cash equivalents and available- |                   
|for-sale securities                   |                   
|Working capital                       |                   
|Total assets                          |                   
|Long-term debt                        |                   
|Total shareholders equity            |                   

17

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

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

Overview

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

During
2003, we received regulatory clearance for sales of four new interventional products:

| |  |  | Vari-Lase
endovenous laser procedure kit.We launched this product in the third quarter of
2003. The Vari-Lase product is a treatment for superficial venous reflux, otherwise known
as varicose veins.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Pronto
Extraction Catheter.We launched this product in international markets at the end of
the third quarter of 2003, and received regulatory clearance for United States sales in
December 2003. The Pronto extraction catheter consists of a catheter with a proprietary
atraumatic distal tip and large extraction lumen for the removal of soft thrombus from
arteries.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | D-Stat
Dry Hemostatic Bandage.We launched this product on September 22, 2003. The D-Stat
Dry hemostatic bandage consists of a freeze-dried pad of our D-Stat procoagulant which
can be applied to topical bleeding with a custom adhesive bandage.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | D-Stat
Radial Hemostatic Band.We received regulatory clearance for this product in
September 2003 and launched this product in the first quarter of 2004. The D-Stat Radial
hemostat band is a customized compression device with the power of the D-Stat
procoagulant for sealing the arterial puncture following catheterization procedures.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
believe these four new products, together with sales of our existing Duett, D-Stat
Flowable and Acolysis products, will result in substantial revenue growth in 2004. We
also believe that these new products will increase our gross margin percent to between
67% and 69% during 2004.

Results of Operations

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

Net
sales decreased modestly to $11,804,328 for the year ended December 31, 2003 from
$12,100,526 for the year ended December 31, 2002. Approximately 87% of our net sales for
the year ended December 31, 2003 were to customers in the United States and 13% of the
net sales were to customers in international markets. Net sales by product category were
as follows:

18

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| |  |  | Net
sales of the D-Stat Dry were $1,085,000 for the year ended December 31, 2003, compared to
no sales in 2002. Our D-Stat Dry product was launched at the end of the third quarter of
2003. Through December 31, 2003, we have sold our D-Stat Dry to 187 of the estimated
3,000 cardiac and interventional radiology labs in the U.S. We expect to increase our
D-Stat Dry net sales to between $8,000,000 and $10,000,000 in 2004.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Net
sales of the Pronto were $97,000 for the year ended December 31, 2003, all from
international sales, compared to no sales in 2002. Our Pronto product was launched at the
end of the third quarter of 2003 in international markets, and we received FDA approval
in December 2003 but did not commence sales in the United States until 2004. We expect to
increase Pronto net sales to between $2,000,000 and $3,000,000 in 2004.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Net
sales of Vari-Lase kits and accessories were $255,000 for the year ended December 31,
2003, compared to no sales in 2002. Our Vari-Lase procedure kit was launched during the
third quarter of 2003. In January 2004 we launched our Vari-Lase laser console, and as a
result we now offer a full line of endovenous laser products to our customers for the
treatment of varicose veins. We expect to increase our Vari-Lase console, kits and
accessory net sales to over $4,000,000 in 2004.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Net
sales of D-Stat Flowable increased to $1,187,000 for the year ended December 31, 2003
from $764,000 for the year ended 2002, a 55% increase. Our reorder rate for the D-Stat
Flowable in 2003 compared to 2002 has remained steady at 58%. We expect to modestly
increase our D-Stat Flowable net sales to $1,500,000 in 2004.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Net
sales of Acolysis products were $185,000 for the year ended December 31, 2003 compared to
$102,000 for the year ended December 31, 2002. We received the CE mark approval for our
own manufacturing activities for the Acolysis probe during the fourth quarter of 2003,
which will allow us to begin to expand our sales and marketing activities internationally
in 2004. We expect to modestly increase Acolysis net sales to $300,000 in 2004.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Net
sales of our Duett sealing device were $8,995,000 for the year ended December 31, 2003
compared to $11,235,000 for the year ended December 31, 2002. Our Duett sales in 2003
were negatively affected by the intense competitive environment in the United States
invasive sealing device market and our new focus on new products. The 20% decrease, year
over year, in Duett net sales also was in line with our 19% decrease in sales and
marketing expenses from the year-prior period. We expect Duett sales to continue to
decline at a rate of between 20% to 30%, year over year, in 2004 as we continue to focus
on our new higher margin and more competitive products.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Gross
profit as a percentage of net sales increased to 61% for the year ended December 31, 2003
from 59% for the year ended December 31, 2002. We added higher margin products to our
selling mix during 2003, particularly our D-Stat Dry which has gross margins greater than
80%. We expect gross margins to increase in 2004 to 67% to 69% as our selling mix changes
to favor the higher margin products and we continue to make slight gains in manufacturing
efficiencies.

Research
and development expenses increased 14% to $3,670,935 for the year ended December 31, 2003
from $3,227,538 for the year ended December 31, 2002. The increase was directly related
to our increased activity in launching four new products in 2003 and our continued work
on our long term research and development projects. Research and development expenses
fluctuate due to outside project spending. We expect our research and development
expenses to remain relatively steady during 2004 as we continue to pursue additional new
products at an expected rate of approximately two new products per year and we continue
to move our longer term development projects forward.

19

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Clinical
and regulatory expenses increased 14% to $1,535,989 for the year ended December 31, 2003
from $1,347,694 for the year ended December 31, 2002. The expected increase was the
result of the approval of our four new products in the second half of 2003 as well as our
Pocket Protector clinical study for a new indication of our D-Stat Flowable
product. Clinical and regulatory expenses fluctuate due to the timing of clinical and
marketing studies. We expect clinical and regulatory expenses to increase by
approximately 25% in 2004 as we complete our Pocket Protector study, conduct
clinical/marketing studies related to our existing products and advance new products
through the regulatory system.

Sales
and marketing expenses decreased 19% to $9,645,920 for the year ended December 31, 2003
from $11,963,907 for the year ended December 31, 2002. During 2002 and 2003 we reviewed
our sales and marketing expenditures and focused our spending in the areas that drive
sales and provide an adequate financial return. As of December 31, 2003, our direct sales
force consisted of approximately 40 employees compared to approximately 50 as of December
31, 2002. We expect to add approximately 10 field sales employees during 2004 to advance
our new products. As a result, we expect our sales and marketing expenses to increase by
approximately 10% in 2004 compared to 2003.

General
and administrative expenses decreased 10% to $1,942,483 for the year ended December 31,
2003 from $2,166,883 for the year ended December 31, 2002. The decrease was primarily the
result of lower legal fees in 2003 compared to 2002, as we incurred legal fees in 2002
relating to the Datascope litigation which was settled in the fourth quarter of 2002. The
reduction in legal fees was partially offset by an increase in the cost of business
insurance. We currently anticipate that general and administrative expenses will remain
relatively constant in 2004.

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

Amortization
of purchased technology was $217,500 for the year ended December 31, 2003 and $145,000 for
the year ended December 31, 2002. The increase is the result of a full year of
amortization in 2003 compared to 2002. The amortization resulted from our acquisition of
the Acolysis assets from the secured creditors of Angiosonics, Inc. We allocated $870,000
from the acquisition to purchased technology and are amortizing the amount over four
years.

Interest
income decreased to $150,342 for the year ended December 31, 2003 from $507,169 for the
year ended December 31, 2002 primarily as a result of a reduced cash balance and lower
interest rates.

Results of Operations

Year ended December 31, 2002
compared to year ended December 31, 2001

Net
sales increased modestly to $12,100,526 for the year ended December 31, 2002 from
$12,082,379 for the year ended December 31, 2001. Approximately 89% of our net sales for
the year ended December 31, 2002 were to customers in the United States and 11% of the net
sales were to customers in international markets. Net sales in 2002 were negatively
affected by the intense competitive environment for our Duett sealing device in the United
States market. Net sales during 2002 benefited from the early sales of our D-Stat Flowable
hemostat, which we launched in February 2002.

Gross
profit as a percentage of net sales was unchanged at 59% for the year ended December 31,
2002 and 2001. We added the Diagnostic Duett, D-Stat and Acolysis products to our selling
mix during 2002, which all have gross margins greater than 60%. The introduction of the
higher margin products in 2002 was offset by a growth in the lower margin international
sales.

20

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Research
and development expenses decreased 22% to $3,227,538 for the year ended December 31, 2002
from $4,123,883 for the year ended December 31, 2001. The decrease was attributable to
more focused development work on the product line extensions and new products during 2002.
Research and development expenses can fluctuate due to outside project spending.

Clinical
and regulatory expenses increased 5% to $1,347,694 for the year ended December 31, 2002
from $1,288,301 for the year ended December 31, 2001. Clinical and regulatory expenses
fluctuate due to the timing of clinical and marketing studies.

Sales
and marketing expenses decreased 6% to $11,963,907 for the year ended December 31, 2002
from $12,771,901 for the year ended December 31, 2001. We reviewed our sales and marketing
expenditures and focused our spending in the areas that drove sales and provided an
adequate financial return. As of December 31, 2002, our direct sales force consisted of
approximately 50 employees compared to approximately 65 as of December 31, 2001.

General
and administrative expenses decreased 13% to $2,166,883 for the year ended December 31,
2002 from $2,498,435 for the year ended December 31, 2001. The decrease was the result of
lower headcount in 2002 compared to 2001.

Legal
settlement expenses were $3,750,000 for the year ended December 31, 2002 and $350,000 for
the year ended December 31, 2001. We entered into an agreement that settled all existing
intellectual property litigation with Datascope Corporation in 2002 (see Legal
Proceedings in Item 3 of Part I of this Form 10-K). As part of the settlement,
Datascope released us from any claim of patent infringement based on past or future sales
of the Duett sealing device. In exchange, we paid Datascope a single lump sum of
$3,750,000 in the fourth quarter of 2002. We entered into an agreement that settled all
existing intellectual property litigation with St. Jude Medical in 2001 (see Legal
Proceedings in Item 3 of Part I of this Form 10-K). As a result of the settlement,
we agreed to pay St. Jude Medical a royalty of 2.5% of our Duett sales up to a maximum
amount over the remaining life of the St. Jude Medical patents. We paid $350,000 to St.
Jude Medical in 2001 representing the past royalty on net sales of our Duett device since
1998 under the settlement agreement.

Amortization
of purchased technology was $145,000 for the year ended December 31, 2002 and $0 for the
year ended December 31, 2001. The amortization was the result of our acquisition of the
Acolysis assets from the secured creditors of Angiosonics, Inc. We allocated $870,000 from
the acquisition to purchased technology and are amortizing the amount over four years.

Interest
income decreased to $507,169 for the year ended December 31, 2002 from $1,660,757 for the
year ended December 31, 2001 primarily as a result of a reduced cash balance and lower
interest rates.

Income Taxes

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

As
of December 31, 2003, we had net operating loss carryforwards of approximately $54,631,000
for U.S. federal income tax purposes which begin to expire in the year 2013. As of
December 31, 2003, we also had federal and state research and development tax credit
carryforwards of approximately $1,353,000 which begin to expire in the year 2013. As of
December 31, 2003, we also had a foreign tax loss carryforward of approximately $1,356,000
which does not expire. Under the Tax Reform Act of 1986, the amounts of and benefits from
net operating loss carryforwards may be impaired or limited in certain circumstances,
including significant changes in ownership interests. Future use of our existing net
operating loss carryforwards may be restricted due to changes in ownership or from future
tax legislation.

21

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Liquidity and Capital Resources

We
have financed all of our operations since inception through the issuance of equity
securities and, to a lesser extent, sales of our products. Through December 31, 2003, we
have sold common stock and preferred stock generating aggregate net proceeds of
approximately $70.5 million. At December 31, 2003, we had $5,885,000 in cash, cash
equivalents and available-for-sale securities on-hand compared to $16,750,000 at December
31, 2002.

During
the year ended December 31, 2003, we used $10,417,000 to fund operating activities. The
cash used in operating activities was primarily used to fund our net loss for the period
of $9,628,000 and an increase in inventory of $1,054,000, which was offset by depreciation
and amortization of $604,000. The increase in inventory is due to the additon of four new
products and our preparation for our expected increase in sales in 2004. During 2003 we
generated proceeds of $11,356,000 in investing activities, primarily from the net sales of
investment securities of $11,895,000, offset by net equipment purchases of $539,000. Also
during 2003 we generated $69,000 in financing activities, primarily from $208,000 we
received through the issuance of common stock under employee stock plans, offset by our
repurchase of our common stock for $140,000.

In
August 2002, the Board of Directors adopted a stock repurchase program to acquire up to
one million shares of our common stock in open market transactions. The Board of Directors
cancelled the program in July 2003 after purchasing a total of 762,300 shares. During
2003, we repurchased 153,400 shares under this stock repurchase program for $140,000.

During
the fourth quarter of 2003, we entered into a $3.0 million credit facility with Silicon
Valley Bank. The line of credit has a 12 month term, bears interest at the rate of prime
plus 0.5% and is secured by a first security interest on all of our assets. The line of
credit includes two covenants: minimum tangible net worth of $8,000,000 and a liquidity
coverage of not less than 1.25 to 1.00. We were in compliance with these covenants at
December 31, 2003. As of December 31, 2003, we had no outstanding balance on the line of
credit balance and the availability was $1.2 million.

We
purchase our requirements for thrombin (a component in the Duett and all of the D-Stat
products) under a Purchase Agreement dated June 10, 1999 with a subsidiary of King
Pharmaceuticals, Inc. The agreement provides for a fixed price, with adjustments based on
the suppliers manufacturing costs and the suppliers annual percentage increase
in the wholesale price of thrombin. The agreement expires on May 29, 2005. During 2004 and
the first five months of 2005, we intend to increase our purchases of thrombin to benefit
from the pricing provisions of the agreement, which we expect will substantially increase
our inventory of thrombin. We believe that these purchases will satisfy our thrombin
requirements for 2004, 2005 and most of 2006. We are currently exploring a new thrombin
supply agreement and evaluating alternative potential suppliers, although there currently
is no other source of commercially-available thrombin approved for use in the United
States.

We
signed a purchase agreement with MedArt Corporation on September 22, 2003 for the
manufacture of our Vari-Lase laser console. Under that agreement, we are obligated to
purchase laser consoles with an aggregate purchase price of $1,197,000 for our Vari-Lase
business during the first year of the agreement, which commenced in December 2003. We do
not have any other significant cash commitments related to supply agreements, nor do we
have any significant commitments for capital expenditures.

22

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The
following table summarizes our contractual cash commitments as of December 31, 2003:

|                                   | Payments due by Period
|---------------------------------- | ----------------------
|
|Facility Operating Lease           |                       
|MedArt Purchase Commitment         |                       
|                                   |                       
|Total Contractual Cash Obligations |                       
|                                   |                       

We
currently anticipate that we will continue to experience a negative cash flow until at
least the fourth quarter of 2004 at which time we project that we will become cash flow
neutral. We currently believe that our working capital of $9.2 million and anticipated
cash from product sales will be sufficient to meet our operating and capital requirements
until we reach cash flow neutral in the fourth quarter of 2004. However, our actual
liquidity and capital requirements will depend upon numerous factors, including the costs
and timing of expansion of sales and marketing activities; the amount of revenues from
sales of our existing and new products; the cost of maintaining, enforcing and defending
patents and other intellectual property rights; competing technological and market
developments; developments related to regulatory and third party reimbursement matters;
the cost and progress of our research and development efforts; and other factors.

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

Critical Accounting Policies:

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

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

Inventory

We
state our inventory at the lower of cost (first-in, first-out method) or market. We record
reserves for inventory shrinkage and for potentially excess, obsolete and slow moving
inventory based upon historical

23

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experience and forecasted demand. At
December 31, 2003, this reserve was $240,000 compared to $260,000 at December 31, 2002.
Our reserve requirements could be materially different if demand for our products
decreased because of competitive conditions or market acceptance, or if products become
obsolete because of advancements in the industry.

Revenue Recognition

We
recognize revenue upon shipment of products to customers, net of estimated returns. 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, 2003, this reserve was $20,000 compared to $40,000 at December 31,
2002. 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, 2003, this reserve was $140,000 compared to $90,000 at
December 31, 2002. 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.

Income Taxes

The
carrying value of our net deferred tax assets assumes that we will be able to generate
sufficient taxable income in the United States and to a lesser extent Germany, based on
estimates and assumptions. We record a valuation allowance to reduce the carrying value of
our net deferred tax asset to the amount that is more likely than not to be realized. For
the year ended December 31, 2003, we recorded a $24.2 million valuation allowance related
to our net deferred tax assets of $24.2 million. In the event we were to determine that we
would be able to realize our deferred tax assets in the future, an adjustment to the
deferred tax asset would increase net income in the period such determination is made. On
a quarterly basis, we evaluate the realizability of our deferred tax assets and assess the
requirement for a valuation allowance.

New Accounting Pronouncements

In
January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, or FIN No. 46.
FIN No. 46 requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient equity at
risk for the entity to finance its activities without additional subordinated financial
support from other parties. FIN No. 46 is effective immediately for all new variable
interest entities created or acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the provisions of FIN No. 46 must
be applied for the first interim or annual period beginning after December 15, 2003. The
adoption of FIN No. 46 did not have a material impact on our financial statements.

24

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# RISK FACTORS

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

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

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

| |  |  | 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 have only very recently commenced sales of our D-Stat Dry hemostatic bandage, Pronto
extraction catheter, Vari-Lase endovenous laser and D-Stat Radial hemostat band products,
we have no ability to predict the level of sales of these products. If we encounter
difficulties in growing our sales of our new medical devices in the United States, our
business will be seriously harmed.

We have limited working capital to
pursue our business

On
December 31, 2003, we had $5.9 million in cash, cash equivalents and marketable securities
and a working capital of $9.2 million. During 2003, our operating activities resulted in
the use of $10.9 million of cash. While we believe that during 2004 our working capital
requirements will decrease due to sales of our new products, there can be no assurance
that our existing working capital will be sufficient to satisfy our working capital needs.
If our sales do not increase, or if we encounter unexpected expenses, we will need to
raise additional working capital. We have no commitments for additional funding and so our
ability to meet our long-term liquidity needs is uncertain. If we raise additional funds
through the issuance of equity securities, our shareholders may experience significant
dilution. Furthermore, additional financing may not be available when needed or, if
available, financing may not be on terms favorable to us or our shareholders. If financing
is not available when required or is not available on acceptable terms, we may be unable
to develop or market our products or take advantage of business opportunities or may be
required to significantly curtail our business operations.

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

Since
we commenced operations in February 1997, we have incurred net losses primarily from costs
relating to the development and commercialization of our Duett sealing device and new
products. At December 31, 2003, we had an accumulated deficit of $59.7 million. We expect
to continue to significantly invest in our sales and marketing, and research and
development activities. Because of our plans to introduce new products and expand our
commercialization, we expect to incur significant net losses through at least the

25

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first half of 2004. Our business
strategies may not be successful, and we may not become profitable in any future period
or at all. If we do become profitable, we cannot be certain that we can sustain or
increase profitability on a quarterly or annual basis.

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

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

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

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

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

We
purchase components used in our products from various suppliers and rely on a single
source for the thrombin component of our Duett sealing device and D-Stat products. There
are currently no FDA-approved alternative suppliers of thrombin. Our current supply
agreement with our thrombin vendor extends through May 2005, and there are no assurances
that a future agreement can be negotiated, or that any future agreement would be on
similar terms. Because it requires FDA approval, establishing additional or replacement
suppliers for thrombin would require a lead-time of at least two years and would involve
significant additional costs. Any supply interruption from our vendor of thrombin or from
any other key vendor, or the failure by us to engage alternative vendors may limit our
ability to manufacture our Duett and D-Stat products and could therefore seriously harm
our business.

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

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

| |  |  | the
level of sales of our products in the United States market;
| | - |  | ---------------------------------------------------------------

26

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| |  |  | our
ability to introduce new products and enhancements in a timely manner;
| | - |  | --------------------------------------------------------------------------

| |  |  | the
demand for and acceptance of our products;
| | - |  | ----------------------------------------------

| |  |  | the
success of our competition and the introduction of alternative products;
| | - |  | ----------------------------------------------------------------------------

| |  |  | our
ability to command favorable pricing for our products;
| | - |  | ----------------------------------------------------------

| |  |  | the
growth of the market for our devices;
| | - |  | -----------------------------------------

| |  |  | the
expansion and rate of success of our direct sales force in the United States and our
independent            distributors internationally;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | actions
relating to ongoing FDA compliance;
| | - |  | -------------------------------------------

| |  |  | the
effect of intellectual property disputes;
| | - |  | ---------------------------------------------

| |  |  | the
size and timing of orders from independent distributors or customers;
| | - |  | -------------------------------------------------------------------------

| |  |  | the
attraction and retention of key personnel, particularly in sales and marketing,
regulatory,            manufacturing and research and development;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | unanticipated
delays or an inability to control costs;
| | - |  | ------------------------------------------------------

| |  |  | general
economic conditions as well as those specific to our customers and markets; and
| | - |  | ---------------------------------------------------------------------------------------

| |  |  | seasonal
fluctuations in revenue due to the elective nature of some procedures.
| | - |  | -------------------------------------------------------------------------------

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

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

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

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

| |  |  | better
name recognition;
| | - |  | ------------------------

| |  |  | broader
product lines;
| | - |  | ----------------------

| |  |  | greater
sales, marketing and distribution capabilities;
| | - |  | -------------------------------------------------------

27

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| |  |  | significantly
greater financial resources;
| | - |  | ------------------------------------------

| |  |  | larger
research and development staffs and facilities; and
| | - |  | ----------------------------------------------------------

| |  |  | existing
relationships with some of our potential customers.
| | - |  | ------------------------------------------------------------

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

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

Our
international sales are subject to several risks, including:

| |  |  | the
ability of our independent distributors to sell our products;
| | - |  | -----------------------------------------------------------------

| |  |  | the
impact of recessions in economies outside the United States;
| | - |  | ----------------------------------------------------------------

| |  |  | greater
difficulty in collecting accounts receivable and longer collection periods;
| | - |  | -----------------------------------------------------------------------------------

| |  |  | unexpected
changes in regulatory requirements, tariffs or other trade barriers;
| | - |  | -------------------------------------------------------------------------------

| |  |  | weaker
intellectual property rights protection in some countries;
| | - |  | -----------------------------------------------------------------

| |  |  | potentially
adverse tax consequences; and
| | - |  | -----------------------------------------

| |  |  | political
and economic instability.
| | - |  | -----------------------------------

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

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

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

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

We
could be seriously harmed by changes in reimbursement policies of governmental or private
healthcare payors, particularly to the extent any changes affect reimbursement for
catheterization procedures

28

---

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

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

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

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

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

| |  |  | obtain
the clearance of the FDA and international agencies before we can market and sell our
products;
| | - |  | ------------------------------------------------------------------------------------------------------

| |  |  | satisfy
these agencies content requirements for all of our labeling, sales and promotional
materials;            and
| | - |  | ---------------------------------------------------------------------------------------------------------------------

| |  |  | undergo
rigorous inspections by these agencies.
| | - |  | -----------------------------------------------

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

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

ITEM 7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

29

---

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

In
the United States and Germany, we sell our products directly to hospitals and clinics in
the local currency. Revenue is recognized upon shipment of products to customers.

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

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

ITEM 8. CONSOLIDATED FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA

The
Consolidated Financial Statements and Notes thereto required pursuant to this Item begin
on page 36 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(f) 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 in timely alerting them to
the material information relating to us (or our consolidated subsidiaries) required to be
included in the reports we file or submit under the Exchange Act.

Changes
in internal controls.

During
the fiscal quarter ended December 31, 2003, there has been no change in our internal
control over financial reporting (as defined in Rule 13 a-15(f) under the Exchange Act)
that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.

30

---

# PART III

ITEM 10. DIRECTORS AND EXECUTIVE
OFFICERS OF THE REGISTRANT

Incorporated
herein by reference to the Sections under the headings Election 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, 2003.

See
Item 1 of Part I hereof for information regarding our Executive Officers.

ITEM 11. EXECUTIVE COMPENSATION

Incorporated
herein by reference to the Sections under the headings Director Compensation
and Executive Compensation and Other Information contained in the Proxy
Statement for our Annual Meeting of Shareholders to be filed with the Securities and
Exchange Commission within 120 days of the close of the year ended December 31, 2003.

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

Incorporated
herein by reference to the Section under the heading Security Ownership of Certain
Beneficial Owners and Management and Equity Compensation Plan
Information contained in the Proxy Statement for our Annual Meeting of Shareholders
to be filed with the Securities and Exchange Commission within 120 days of the close of
the year ended December 31, 2003.

ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS

None.

ITEM 14. PRINCIPAL ACCOUNTING FEES
AND SERVICES

Incorporated
herein by reference to the Section under the heading Additional Information about
our Independent Auditor contained in the Proxy Statement for our Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission within 120 days of
the close of the year ended December 31, 2003.

31

---

# PART IV

ITEM 15. EXHIBITS, FINANCIAL
STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

|(a) |  | Documents
filed as part of this Report.
|--- |  | ---------------------------------------

| | (1) |  | The
following financial statements are filed herewith in Item 8 in Part II.
| | --- |  | ---------------------------------------------------------------------------

| |  | (i) |  | Report
of Independent Auditors
| |  | --- |  | ------------------------------

| |  | (ii) |  | Consolidated
Balance Sheets
| |  | ---- |  | ---------------------------

| |  | (iii) |  | Consolidated
Statements of Operations
| |  | ----- |  | -------------------------------------

| |  | (iv) |  | Consolidated
Statement 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         
|               |            
|3              | .2         
|               |            
|4              | .1         
|               |            
|4              | .2         
|               |            
|4              | .3         
|               |            
|4              | .4         
|               |            
|4              | .5         
|               |            
|10             | .1         

32

---

|10 | .2    | 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- | 
|-- | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|   |      
|10 | .3    | 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)).     | 
|   |      
|10 | .4    | Purchase Agreement dated June 10, 1999 by and between GenTrac, Inc. and Vascular Solutions, Inc. (incorporated by reference to Exhibit 10.9 of Vascular Solutions Registration Statement on Form S-1 (File No. 333-84089)).                | 
|   |      
|10 | .5*   | Form of Employment Agreement by and between Vascular Solutions, Inc. and each of its executive officers (incorporated by reference to Exhibit 10.11 of Vascular Solutions Registration Statement on Form S-1 (File No. 333-84089)).        | 
|   |      
|10 | .6    | 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 | .7*   | 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 | .8    | Settlement Agreement dated July 12, 2001 by and between Vascular Solutions and St. Jude Medical and Daig Corporation (incorporated by reference to Exhibit 99.2 to Vascular Solutions Form 8-K dated July 12, 2001).                       | 
|   |      
|10 | .9    | Purchase Agreement dated April 30, 2002 by and between Vascular Solutions and Angiosonics (incorporated by reference to Exhibit 99.2 to Vascular Solutions Form 8-K dated April 30, 2002).                                                 | 
|   |      
|10 | .10*  | Stock Option and Stock Award Plan as Amended July 16, 2002 (incorporated by reference to Exhibit 10.1 of Vascular Solutions Form 10-Q for the quarter ended June 30, 2002).                                                                | 
|10 | .11   | Settlement Agreement dated November 26, 2002 by and between Vascular Solutions and Datascope (incorporated by reference to Exhibit 99.2 to Vascular Solutions Form 8-K dated November 26, 2002).                                           | 
|   |      
|10 | .12** | License and Supply Agreement dated December 17, 2002 by and between Vascular Solutions and Tepha, Inc. (incorporated by reference to Exhibit 10.17 of Vascular Solutions Form 10-K for the year ended December 31, 2002).                  | 
|   |      
|10 | .13** | Private Label Purchase Agreement dated September 22, 2003 by and between Vascular Solutions and MedArt Corportation (incorporated by reference to Exhibit 10.18 of Vascular Solutions Form 10-Q for the quarter ended September 30, 3003). | 
|   |      
|10 | .14   | Loan and Security Agreement dated December 31, 2003 by and between Vascular Solutions and Silicon Valley Bank.                                                                                                                              | 
|   |      
|14 |       | Code of Ethics                                                                                                                                                                                                                              | 
|   |      
|21 |       | List of Subsidiaries                                                                                                                                                                                                                        | 
|   |      
|23 | .1    | Consent of Ernst & Young LLP.                                                                                                                                                                                                               | 
|   |      
|24 | .1    | Power of Attorney (included on signature page).                                                                                                                                                                                             | 
|   |      
|31 | .1    | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                         | 
|   |      
|31 | .2    | Certification of Chief Financial Officer pursuant to Section 302 of the Sabanes-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.                                                                                                                                         | 

33

---

_________________ * Management contract or
compensatory plan or arrangement required to be filed as an Exhibit to this Form 10-K. ** Certain portions of this exhibit have been omitted pending a request for
confidential treatment from the SEC.

(b)  Reports
on Form 8-K:

We furnished a Form 8-K on October
15, 2003 to report our press release dated October 15, 2003 on our third quarter results.

(c)  See
Item 15(a)(3) above.

(d)  See
Item 15(a)(2) above.

34

---

# 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 27th day of February, 2004.

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

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed
on the 19th day of February, 2004, 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      | Chief Financial Officer                     
|James Hennen          | (Principal Financial and Accounting Officer)
|/s/ James Jacoby, Jr. | Director                                    
|James Jacoby, Jr.    
|/s/ Richard Nigon     | Director                                    
|Richard Nigon        
|/s/ Michael Kopp      | Director                                    
|Michael Kopp         
|/s/ Paul OConnell    | Director                                    
|Paul OConnell       
|/s/ John Erb          | Director                                    
|John Erb             
|/s/ Dr. Gary Dorfman  | Director                                    
|Dr. Gary Dorfman     

35

---

# SCHEDULE II

# VALUATION AND
QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001

# 

|Description                     | Balance at
Beginning
of Year | Additions
Charged
to Costs
and
Expenses | Less
Deductions | Balance at
End of Year
|------------------------------- | ---------------------------- | --------------------------------------- | --------------- | ----------------------
|YEAR ENDED DECEMBER 31, 2003:   |                              |                                         |                 |                       
|Sales return allowance          |                              |                                         | $               | 40,000                
|Allowance for doubtful accounts |                              |                                         |                 | 90,000                
|                                |                              |                                         |                 |                       
|Total                           |                              |                                         | $               | 130,000               
|                                |                              |                                         |                 |                       
|YEAR ENDED DECEMBER 31, 2002:   |                              |                                        
|Sales return allowance          |                              |                                         |                 | 64,526                
|Allowance for doubtful accounts |                              |                                         |                 | 110,000               
|                                |                              |                                         |                 |                       
|Total                           |                              |                                         | $               | 174,526               
|                                |                              |                                         |                 |                       
|Year Ended December 31, 2001:   |                              |                                        
|Sales return allowance          |                              |                                         |                 |                      
|Allowance for doubtful accounts |                              |                                         |                 | 80,000                
|                                |                              |                                         |                 |                       
|Total                           |                              |                                         | $               | 80,000                
|                                |                              |                                         |                 |                       

36

---

Report of Independent
Auditors

The Board of Directors and
ShareholdersVascular Solutions, Inc.

We have audited the consolidated
balance sheets of Vascular Solutions, Inc. as of December 31, 2003 and 2002, and the
related statements of operations, changes in shareholders equity, and cash flows
for each of the three years in the period ended December 31, 2003. These financial
statements are the responsibility of the Companys management. Our responsibility is
to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial
statements referred to above present fairly, in all material respects, the consolidated
financial position of Vascular Solutions, Inc. at December 31, 2003 and 2002, and the
consolidated results of its operations and its cash flows for each of the three years in
the period ended December 31, 2003 in conformity with accounting principles generally
accepted in the United States.

Ernst & Young LLP

Minneapolis, MinnesotaJanuary 16,
2004

37

---

Vascular Solutions,
Inc.

Consolidated Balance
Sheets

|                                                     | December 31
|---------------------------------------------------- | -----------
|
|Assets                                               |            
|Current assets:                                      |            
|Cash and cash equivalents                            |            
|Available-for-sale securities                        |            
|Accounts receivable, net of reserves of $160,000 and |            
|$130,000 in 2003 and 2002, respectively              |            
|Inventories                                          |            
|Prepaid expenses                                     |            
|                                                     |            
|Total current assets                                 |            
|Property and equipment, net                          |            
|Intangible assets, net                               |            
|                                                     |            
|Total assets                                         |            
|                                                     |            
|Liabilities and Shareholders Equity                 |            
|Current liabilities:                                 |            
|Accounts payable                                     |            
|Accrued compensation                                 |            
|Accrued expenses                                     |            
|                                                     |            
|Total current liabilities                            |            
|Commitments                                          |            
|Shareholders equity:                                |            
|Common stock, $0.01 par value:                       |            
|Authorized shares - 40,000,000                       |            
|Issued and outstanding shares - 12,989,170 - 2003;   |            
|12,880,839 - 2002                                    |            
|Additional paid-in capital                           |            
|Other                                                |            
|Accumulated deficit                                  |            
|                                                     |            
|Total shareholders equity                           |            
|                                                     |            
|Total liabilities and shareholders equity           |            
|                                                     |            

See accompanying notes

38

---

Vascular Solutions,
Inc.

Consolidated Statements
of Operations

|                                           | Year Ended December 31
|------------------------------------------ | ----------------------
|
|Net sales                                  |                       
|Cost of goods sold                         |                       
|                                           |                       
|Gross profit                               |                       
|Operating expenses:                        |                       
|Research and development                   |                       
|Clinical and regulatory                    |                       
|Sales and marketing                        |                       
|General and administrative                 |                       
|Legal settlement                           |                       
|Amortization of purchased technology       |                       
|                                           |                       
|Total operating expenses                   |                       
|                                           |                       
|Operating loss                             |                       
|Interest income                            |                       
|                                           |                       
|Net loss                                   |                       
|                                           |                       
|Basic and diluted net loss per share       |                       
|                                           |                       
|Shares used in computing basic and diluted |                       
|net loss per share                         |                       
|                                           |                       

See accompanying notes

39

---

Vascular Solutions,
Inc.

Consolidated Statement
of Changes in Shareholders Equity

|                                      | Common Stock |  |  |            |  
|------------------------------------- | ------------ |  |  | ---------- | -
|
|Balance at December 31, 2000          |              |  |  | 13,116,008 |  
|Exercise of stock options             |              |  |  | 120,800    |  
|Issuance of common stock under the    |              | 
|Employee Stock Purchase Plan          |              |  |  | 90,194     |  
|Value of stock options granted for    |              | 
|services                              |              |  |  |           |  
|Deferred compensation related to      |              | 
|option grants                         |              |  |  |           |  
|Amortization of deferred compensation |              |  |  |           |  
|Comprehensive loss:                   |              | 
|Net loss                              |              |  |  |           |  
|Translation adjustment                |              |  |  |           |  
|                                      |              |  |  |            |  
|Total comprehensive loss              |              |  |  |            |  
|                                      |              |  |  |            |  
|Balance at December 31, 2001          |              |  |  | 13,327,002 |  
|Exercise of stock options             |              |  |  | 10,000     |  
|Issuance of common stock under the    |              | 
|Employee Stock Purchase Plan          |              |  |  | 152,737    |  
|Stock repurchase program              |              |  |  | (608,900   | )
|Deferred compensation related to      |              | 
|option grants                         |              |  |  |           |  
|Amortization of deferred compensation |              |  |  |           |  
|Comprehensive loss:                   |              | 
|Net loss                              |              |  |  |           |  
|Translation adjustment                |              |  |  |           |  
|                                      |              |  |  |            |  
|Total comprehensive loss              |              |  |  |            |  
|                                      |              |  |  |            |  
|Balance at December 31, 2002          |              |  |  | 12,880,839 |  
|Exercise of stock options             |              |  |  | 65,855     |  
|Issuance of common stock under the    |              | 
|Employee Stock Purchase Plan          |              |  |  | 195,876    |  
|Stock repurchase program              |              |  |  | (153,400   | )
|Amortization of deferred compensation |              |  |  |           |  
|Comprehensive loss:                   |              | 
|Net loss                              |              |  |  |           |  
|Translation adjustment                |              |  |  |           |  
|                                      |              |  |  |            |  
|Total comprehensive loss              |              |  |  |            |  
|                                      |              |  |  |            |  
|Balance at December 31, 2003          |              |  |  | 12,989,170 |  
|                                      |              |  |  |            |  

See accompanying notes.

40

---

Vascular Solutions, Inc.

Consolidated Statements
of Cash Flows

|                                                    | Year Ended December 31
|--------------------------------------------------- | ----------------------
|
|Operating activities                                |                       
|Net loss                                            |                       
|Adjustments to reconcile net loss to net cash used  |                       
|in operating activities:                            |                       
|Depreciation                                        |                       
|Amortization                                        |                       
|Value of options granted for services               |                       
|Deferred compensation expense                       |                       
|Changes in operating assets and liabilities:        |                       
|Accounts receivable                                 |                       
|Inventories                                         |                       
|Prepaid expenses                                    |                       
|Accounts payable                                    |                       
|Accrued compensation and expenses                   |                       
|                                                    |                       
|Net cash used in operating activities               |                       
|Investing Activities                                |                       
|Purchase of Acolysis assets                         |                       
|Purchase of property and equipment                  |                       
|Purchase of securities                              |                       
|Proceeds from sales of securities                   |                       
|                                                    |                       
|Net cash provided by (used in) investing activities |                       
|Financing Activities                                |                       
|Proceeds from exercise of stock options             |                       
|Net proceeds from sale of common stock              |                       
|Repurchase of common stock                          |                       
|                                                    |                       
|Net cash provided (used in) by financing activities |                       
|Effect of exchange rate changes on cash and cash    |                       
|equivalents                                         |                       
|                                                    |                       
|Increase (decrease) in cash and cash equivalents    |                       
|Cash and cash equivalents at beginning of year      |                       
|                                                    |                       
|Cash and cash equivalents at end of year            |                       
|                                                    |                       

See accompanying notes.

41

---

1. Description of Business

Vascular Solutions, Inc. (the
Company) is a medical device company focused on bringing solutions to interventional
cardiologists and interventional radiologists. The Companys product line includes
the Duett sealing device, the D-Stat flowable hemostat, the D-Stat Dry
bangage, the D-Stat Radial hemostat band, the Vari-Lase endovenous laser procedure kit
& laser, the Pronto extraction catheter and the Acolysis®therapeutic ultrasound
system. As a vertically-intergrated medical device company, the Company generates ideas
and creates new interventional medical devices, and then delivers those products directly
to the physician through its direct domestic sales force and international distribution
network. The Duett sealing device is designed to provide a complete seal of the puncture
site following catheterization procedures such as angiography, angioplasty and stenting.
The D-Stat flowable hemostat is a thick, yet flowable blood clotting material that is
used in a wide variety of interventional medical procedures for the local control of
bleeding. The D-Stat Dry bandage consists of a freeze-dried pad of the D-Stat
procoagulant which can be applied to topical bleeding with a custom adhesive bandage. The
D-Stat Radial is a customized compression device containing a freeze-dried pad of the
D-Stat procoagulant for sealing the arterial puncture following catheterization
procedures utilizing the radial artery in the wrist. The Vari-Lase product is a treatment
for superficial venous reflux, otherwise known as varicose veins. The Pronto extraction
catheter consists of a catheter with a proprietary atraumatic distal tip and large
extraction lumen for the removal of soft thrombus from arteries. The Acolysis
intravascular therapeutic ultrasound system delivers ultrasound waves to lyse blood clots
and plaque in arteries. The Acolysis system is not available for sale in the United
States. The Company was incorporated 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.

Foreign Currency Translation and
Transactions

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

Comprehensive Loss

The components of comprehensive loss
are net loss and the effects of foreign currency translation adjustments.

Use of Estimates

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

42

---

2. Summary of Significant Accounting
Policies (continued)

Cash and Cash Equivalents

The Company classifies all highly
liquid investments with initial maturities of three months or less as cash equivalents.
Cash equivalents consist of cash and money market funds and are stated at cost, which
approximates market value.

Available-for-Sale Securities

The Company classifies investments
as available-for-sale securities. Available-for-sale securities consist of U.S.
Government obligations and investment-grade corporate debt with maturities of up to one
year. These investments are stated at amortized cost, which approximates market value.

At December 31, 2003 and 2002, the
Company had the following available for sale securities with carrying values equal to
fair values:

|                            | 2003 | 2002
|--------------------------- | ---- | ----
|Corporate Debt              |      |     
|U.S. Government Obligations |      |     
|                            |     
|                            |      |     
|                            |     

Inventories

Inventories are stated at the lower
of cost (first-in, first-out method) or market and are comprised of the following at
December 31:

|                | 2003 | 2002
|--------------- | ---- | ----
|Raw materials   |      |     
|Work-in-process |      |     
|Finished goods  |      |     
|                |     
|                |      |     
|                |     

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            | 3 to 5 years               
|---------------------------------- | ---------------------------
|Office and computer equipment      | 3 years                    
|Furniture and fixtures             | 2 to 5 years               
|Leasehold improvements             | Remaining term of the lease
|Research and development equipment | 3 to 5 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.

43

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2. Summary of Significant Accounting
Policies (continued)

Revenue Recognition

In the United States and Germany,
the Company sells its products directly to hospitals and clinics. Revenue is recognized
upon shipment of products to customers, net of estimated returns.

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

Research and Development Costs

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

Stock-Based Compensation

At December 31, 2003, the Company
had a stock-based employee compensation plan, which is described more fully in Note 9.
The Company accounts for those plans under the recognition and measurement principles of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. No stock-based employee compensation cost is
reflected in net loss, as all options granted under those plans had an exercise price
equal to the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net loss and loss per share if the Company had
applied the fair value recognition provisions of Financial Accounting Standards Board
(FASB) Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, to stock-based employer compensation.

|                                                | Year Ended December 31
|----------------------------------------------- | ----------------------
|
|Net loss, as reported                           |                       
|Deduct: Total stock-based employee compensation |                       
|expense determined under fair-value-based       |                       
|method for all awards                           |                       
|                                                |                       
|Pro forma net loss                              |                       
|                                                |                       
|Net loss per share:                             |                       
|Basic and diluted - as reported                 |                       
|                                                |                       
|Basic and diluted - pro forma                   |                       
|                                                |                       

44

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2. Summary of Significant Accounting
Policies (continued)

For purposes of calculating the
above-required disclosure, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model. The fair value of the Companys
stock options was estimated assuming no expected dividends and the following weighted
average assumptions:

|                        | 2003 | 2002 | 2001
|----------------------- | ---- | ---- | ----
|Expected life (years)   |      |      |     
|Expected volatility     |      |      |     
|Risk-free interest rate |      |      |     

The weighted average fair value of
options granted with an exercise price equal to the deemed stock price on the date of
grant during 2003, 2002, and 2001 was $0.71, $1.58, and $5.31, respectively.

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.

Concentrations of Credit Risk

Financial instruments that
potentially subject the Company to concentrations of credit risk consist primarily of
cash and cash equivalents, investments, and accounts receivable. The Company maintains
its accounts for cash and cash equivalents and investments principally at one major bank
and two investment firms in the United States. The Company has a formal written
investment policy that restricts the placement of investments to issuers evaluated as
creditworthy. The Company has not experienced any losses on its deposits of its cash and
cash equivalents.

With respect to accounts receivable,
the Company performs credit evaluations of its customers and does not require collateral.
One customer accounted for 4% of gross accounts receivable as of December 31, 2003 and
one customer accounted for 5% of gross accounts receivable as of December 31, 2002. There
have been no material losses on customer receivables.

Net Loss Per Share

In accordance with SFAS No. 128, Earnings
Per Share, basic net loss per share is computed by dividing net loss by the weighted
average common shares outstanding during the periods presented. Diluted net loss per
share is computed by dividing net loss by the weighted average common and dilutive
potential common shares outstanding computed in accordance with the treasury stock
method. For all periods presented, diluted loss per share is the same as basic loss per
share, because the effect of outstanding options, warrants, and convertible preferred
stock is antidilutive.

Reclassifications

Certain prior year balances were
reclassified to conform to the current year presentation.

45

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2. Summary of Significant Accounting
Policies (continued)

Goodwill and Other Intangible Assets

In fiscal 2002, the Company adopted
SFAS No. 142, Goodwill and Other Intangible Assets. Goodwill is tested for
impairment annually in the fourth quarter or more frequently if changes in circumstances
or the occurrence of events suggest an impairment exists. The Company has concluded that
no impairment of goodwill exists as of December 31, 2003.

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

New Accounting Pronouncements

In January 2003, the Financial
Accounting Standards Board issued FASB Interpretation No. 46, Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51, or FIN No. 46. FIN No. 46 requires
certain variable interest entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from other
parties. FIN No. 46 is effective immediately for all new variable interest entities
created or acquired after January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of FIN No. 46 must be applied for the
first interim or annual period beginning after December 15, 2003. The adoption of FIN No.
46 did not have a material impact on the Companys financial statements.

3. Acquisition of Certain Assets of
Angiosonics, Inc.

On April 29, 2002, the Company
purchased the Acolysis® intravascular ultrasound assets and related patents and
technologies from the secured creditors of Angiosonics, Inc. in exchange for $1,500,000
in cash. The Company allocated the purchase price of $1,500,000 and the related
transaction fees using the fair market value of the assets. The Company allocated
$487,608 to inventory and fixed assets, $870,000 to purchased technology, and $192,595 to
goodwill.

4. Goodwill and Other Intangible
Assets

As discussed in Note 2, the Company
adopted SFAS No. 142 in fiscal 2002, and determined that the developed technology the
Company acquired from Angiosonics, Inc. in April 2002 would be amortized over its useful
life of four years. The goodwill acquired will not be amortized. The Company expects the
future annual amortization expense for its acquired purchased development to be
approximately $217,500 for each of the next two fiscal years and approximately $72,500 in
the third fiscal year.

46

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4. Goodwill and Other Intangible
Assets (continued)

Balances of acquired intangible
assets as of December 31, 2003 were as follows:

|                            | Carrying
Amount | Accumulated
Amortization | Net
|--------------------------- | --------------- | ------------------------ | ---
|Amortizing intangibles:     |                 |                          |    
|Purchased technology        |                 |                          | $  
|Non-amortizing intangibles: |                 |                         
|Goodwill                    |                 |                          |    
|                            |                
|                            |                 |                          | $  
|                            |                

5. Property and Equipment

Property and equipment consists of
the following at December 31:

|                                   | 2003 | 2002
|---------------------------------- | ---- | ----
|Property and equipment:            |      |     
|Manufacturing equipment            |      |     
|Office and computer equipment      |      |     
|Furniture and fixtures             |      |     
|Leasehold improvements             |      |     
|Research and development equipment |      |     
|                                   |     
|                                   |      |     
|Less accumulated depreciation      |      |     
|                                   |     
|Net property and equipment         |      |     
|                                   |     

6. Line of Credit

On December 31, 2003, the Company
entered into a secured asset-based loan and security agreement. This new line of credit
is a one-year, $3,000,000 facility with availability based primarily on eligible customer
receivables and inventory. The interest rate is Prime plus 0.5% with a floor of 4.5%. As
of December 31, 2003, the Company had no outstanding loan balance against the facility.
Based on the Companys eligible customer receivables, inventory and cash balances,
$1,164,000 was available for borrowing as of December 31, 2003. The fee for the unused
portion of the line of credit is $1,250 per each quarter. The facility fee of $15,000 is
payable upon the first advance. This line of credit includes two covenants: minimum
tangible net worth of $8,000,000 and a liquidity coverage of not less than 1.25 to 1.00.
The Company was in compliance with these covenants at December 31, 2003.

47

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7. Leases

The Company leases a 33,000
square-foot office and manufacturing facility under an operating lease agreement, which
expires in September 2008. Rent expense related to the operating leases was approximately
$336,000, $303,100, and $306,600 for the years ended December 31, 2003, 2002, and 2001,
respectively.

Future minimum lease commitments
under these operating leases as of December 31, 2003 are as follows:

|2004 |  |  |   | 348,948   | 
|---- |  |  | - | --------- | 
|2005 |  |  |   | 348,948   | 
|2006 |  |  |   | 363,132   | 
|2007 |  |  |   | 370,224   | 
|2008 |  |  |   | 277,668   | 
|     |  | 
|     |  |  | $ | 1,708,920 | 
|     |  | 

8. Income Taxes

At December 31, 2003, the Company
had net operating loss carryforwards of approximately $54,631,000 for federal income tax
purposes that are available to offset future taxable income and begin to expire in the
year 2013. At December 31, 2003, the Company also had federal and Minnesota research and
development tax credit carryforwards of approximately $1,353,000 which begin to expire in
the year 2013. At December 31, 2003, the Company has foreign tax loss carryforwards of
approximately $1,356,000 that do not expire. No benefit has been recorded for any loss
carryforwards, and utilization in future years may be limited under Sections 382 and
383 of the Internal Revenue Code if significant ownership changes have occurred.

The components of the Companys
deferred tax assets and liabilities as of December 31, 2003 and 2002 are as follows:

|                                 | 2003 | 2002
|-------------------------------- | ---- | ----
|Deferred tax assets:             |      |     
|Net operating loss carryforwards |      |     
|Tax credit carryforwards         |      |     
|Depreciation and amortization    |      |     
|Accrued compensation             |      |     
|Other allowances                 |      |     
|Inventory reserve                |      |     
|                                 |     
|                                 |      |     
|Less valuation allowances        |      |     
|                                 |     
|Net deferred taxes               |      |     
|                                 |     

The Company 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.

48

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8. Income Taxes (continued)

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

|                                           | 2003 | 2002 | 2001
|------------------------------------------ | ---- | ---- | ----
|Tax at statutory rate                      |      |      |     
|State income taxes, net of federal bendfit |      |      |     
|Meals and entertainment                    |      |      |     
|Federal research credits                   |      |      |     
|Impact of net operating loss carryforward  |      |      |     
|                                           |     
|Effective income tax rate                  |      |      |     
|                                           |     

9. Stock Options and Warrants

Stock Option Plan

The Company has a stock option and
stock award plan (the Stock Option Plan) which provides for the granting of incentive
stock options to employees and nonqualified stock options to employees, directors, and
consultants. As of December 31, 2003, the Company had reserved 2,900,000 shares of
common stock under the Stock Option Plan. Under the Stock Option Plan, incentive 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. The exercise price of a nonqualified
option granted under the Stock Option Plan must not be less than 50% of the fair market
value of the Companys common stock on the grant date. Prior to the initial public
offering in July 2000, the Board of Directors determined the fair value of the common
shares underlying options by assessing the business progress of the Company as well as
the market conditions for medical device companies and other external factors. The
options expire on the date determined by the Board of Directors but may not extend more
than ten years from the grant date. The Stock Option Plan also permits the granting of
stock appreciation rights, restricted stock, and other stock-based awards. The incentive
stock options generally become exercisable over a four-year period and the nonqualified
stock options generally become exercisable over a two-year period. Unexercised options
are canceled 90 days after termination of employment and become available under the Stock
Option Plan.

In the third quarter of 2002, the
Company offered to exchange for its current employees, other than the Chief Executive
Officer, any outstanding options to purchase shares of the Companys common stock
under the Stock Option Plan with an exercise price of at least $3.00 per share for new
options the Company will grant under the plan. The new options were granted on February
18, 2003, which was six months and two business days after the date the options were
exchanged. The Company granted 428,570 new options under the Stock Option Plan at an
exercise price of $0.84. The number of shares granted to each participating option holder
was the number of shares subject to the eligible options tendered by such option holder.
A stock option holder had to be employed by the Company through February 18, 2003 in
order to be eligible to receive the new options. As a result of this exchange of options,
467,070 options with an average price of $6.80 were canceled.

49

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9. Stock Options and Warrants
(continued)

Option activity is summarized as
follows:

|                             | Shares
Available
for Grant | Plan Options
Outstanding | Exercise
Price | Weighted
Average
Exercise
Price
|---------------------------- | -------------------------- | ------------------------ | -------------- | -------------------------------
|Balance at December 31, 2000 |                            |                          |                | 174,629                        
|Shares reserved              |                            |                          |                | 500,000                        
|Granted                      |                            |                          |                | (972,000                       
|Exercised                    |                            |                          |                |                               
|Canceled                     |                            |                          |                | 347,160                        
|                             |                            |                          |                |                                
|Balance at December 31, 2001 |                            |                          |                | 49,789                         
|Shares reserved              |                            |                          |                | 500,000                        
|Granted                      |                            |                          |                | (186,000                       
|Exercised                    |                            |                          |                |                               
|Canceled                     |                            |                          |                | 849,890                        
|                             |                            |                          |                |                                
|Balance at December 31, 2002 |                            |                          |                | 1,213,679                      
|Shares reserved              |                            |                          |                | 500,000                        
|Granted                      |                            |                          |                | (889,070                       
|Exercised                    |                            |                          |                |                               
|Canceled                     |                            |                          |                | 218,965                        
|                             |                            |                          |                |                                
|Balance at December 31, 2003 |                            |                          |                | 1,043,574                      
|                             |                            |                          |                |                                

The following table summarizes
information about stock options outstanding at December 31, 2003:

|                | Options Outstanding | Options Exercisable
|--------------- | ------------------- | -------------------
|
|$ 0.78 - $ 0.83 |                     |                    
|0.84 -   0.84   |                     |                    
|0.85 -   2.51   |                     |                    
|2.52 -   7.00   |                     |                    
|7.01 -  12.00   |                     |                    
|                |                     |                    
|                |                     |                    
|                |                     |                    

For the year ended December 31,
2001, the Company recorded compensation expense of $10,398 in connection with
nonqualified stock options granted to outside consultants.

Deferred Compensation

In 2003, 2002, and 2001, the Company
recorded $0, $1,858, and $123,780 of deferred compensation in connection with certain
nonqualified stock options granted to medical advisory board members, respectively. The
weighted average fair value of these options was $2.79. The deferred compensation
recorded is amortized ratably over the period that the options vest and is adjusted for
options which have been canceled. Deferred compensation expense was $40,545, $74,668 ,
and $62,850 for the years ended December 31, 2003, 2002, and 2001, respectively.

50

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9. Stock Options and Warrants
(continued)

Warrants

As of December 31, 2003, the Company
had the following warrants outstanding and exercisable:

|Exercise Price | Outstanding as of
December 31, 2003 | Expiration Date
|-------------- | ----------------------------------- | ---------------
|$              | 5                                   | .00            
|               | 1                                   | .50            
|               | 1                                   | .50            
|               | 3                                   | .00            
|               |                                    
|$              | 3                                   | .19            
|               |                                    

10. Employee Stock Purchase Plan

The Company has an Employee Stock
Purchase Plan (the Purchase Plan) under which 900,000 shares of common stock have been
reserved for issuance. Eligible employees may contribute 1% to 10% of their compensation
to purchase shares of the Companys common stock at a discount of 15% of the market
value at certain plan-defined dates up to a maximum of 2,000 shares per purchasing
period. The Purchase Plan terminates in May 2010. In fiscal 2003, 2002, and 2001, 195,876
shares, 152,737 shares, and 90,194 shares, respectively, were issued under the Purchase
Plan. At December 31, 2003, 461,193 shares were available for issuance under the Purchase
Plan.

11. Stock Repurchase Program

In August 2002, the Board of
Directors authorized a stock repurchase program to acquire up to 1,000,000 shares of
outstanding common stock in the open market, block purchases, or private transactions. In
fiscal 2003 and 2002, respectively, the Company repurchased and retired 153,400 and
608,900 shares of the Companys common stock for an aggregate purchase price of
$139,633 and $547,722. In October 2003, the Board of Directors terminated the stock
repurchase program.

12. 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.
Through December 31, 2001, the Plan allowed eligible employees to contribute up to 18% of
their annual compensation. Effective January 1, 2002, the employee contribution limit was
increased 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 $74,258, $91,170,
and $112,084 for contributions to the Plan for the years ended December 31, 2003,
2002, and 2001, respectively.

13. Concentrations of Credit and
Other Risks

In the United States and Germany,
the Company sells its products directly to hospitals and clinics. In all other
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.

51

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13. Concentrations of Credit and
Other Risks (continued)

No customers were more than 5% of
net sales for the years ended December 31, 2003, 2002 and 2001.

The Company performs ongoing credit
evaluations of its customers but does not require collateral. There have been no material
losses on customer receivables.

Sales by geographic destination as a
percentage of total net sales were as follows for the years ended December 31:

|         | 2003 | 2002 | 2001
|-------- | ---- | ---- | ----
|Domestic |      |      |     
|Foreign  |      |      |     

14. Dependence on Key Suppliers

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 their requirements for thrombin (a component in the
Duett and D-Stat products) under a Purchase Agreement dated June 10, 1999 with a
subsidiary of King Pharmaceuticals, Inc. The agreement provides for a fixed price, with
adjustments based on the suppliers manufacturing costs and the suppliers
annual percentage increase in the wholesale price of thrombin. The agreement expires on
May 29, 2005. During 2004 and the first half of 2005, the Company intends to increase its
purchases of thrombin to benefit from the pricing provisions of the agreement, which the
Company expects will substantially increase their inventory of thrombin. The Company
believes that these purchases will satisfy its thrombin requirements for 2004, 2005 and
most of 2006. The Company is currently exploring a new thrombin supply agreement and
evaluating alternative potential suppliers, although there currently is no other source
of commercially-available thrombin approved for use in the United States.

15. Commitments and Contingencies

Datascope Litigation

In July 1999, the Company was named
as a defendant in a patent infringement lawsuit brought by Datascope Corporation
(Datascope), a competitor, in the United States District Court of the District of
Minnesota. The complaint requested a judgment that the Companys device infringes
and, following FDA approval, will infringe, a United States patent held by Datascope and
asks for relief in the form of an injunction that would prevent the Company from selling
its product in the United States as well as an award of attorneys fees, costs, and
disbursements. On August 12, 1999, the Company filed its answer to this lawsuit and
brought a counterclaim alleging unfair competition and tortious interference against
Datascope. On August 20, 1999, the Company moved for summary judgment to dismiss Datascopes
claims. On March 15, 2000, the court granted summary judgment dismissing all of Datascopes
claims, subject to the right of Datascope to recommence the litigation after the Companys
receipt of FDA approval of the Duett sealing device. On July 12, 2000, after the Company
received FDA approval, Datascope recommenced this litigation, alleging that the Duett
sealing device infringes a United States patent held by Datascope and requesting relief
in the form of an injunction that would prevent the Company from selling its product in
the United States, damages caused by the alleged infringement, and other costs,
disbursements, and attorneys fees.

52

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15. Commitments and Contingencies
(continued)

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

St. Jude Medical Litigation

On July 3, 2000, the Company was
named as the defendant in a patent infringement lawsuit brought by the Daig division of
St. Jude Medical, Inc. (St. Jude Medical), a competitor, in the United States
District Court of the District of Minnesota. The complaint requests a judgment that the
Companys Duett sealing device infringes a series of four patents held by St. Jude
Medical and asks for relief in the form of an injunction that would prevent the Company
from selling its product in the United States, damages caused by the manufacture and sale
of the Companys product, and other costs, disbursements, and attorneys fees.

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

Diomed Litigation

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

MedArt Purchase Commitment

The Company signed a purchase
agreement with MedArt Corporation on September 22, 2003. Under that agreement, the
Company is obligated to purchase laser consoles with an aggregate purchase price of
$1,197,000 for their Vari-Lase business during the first year of the agreement, which
commenced in December 2003. The Company plans to start selling its laser consoles during
the first quarter of 2004.

53

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

|2003                       | First
Quarter | Second
Quarter | Third
Quarter | Fourth
Quarter
|-------------------------- | ------------- | -------------- | ------------- | --------------
|Net sales                  |               |                | $             | 2,968         
|Gross profit               |               |                |               | 1,746         
|Operating loss             |               |                |               | (2,659        
|Net loss                   |               |                |               | (2,597        
|Basic and diluted net loss |               |               
|per share                  |               |                | $             | (0.20         
|
|Net sales                  |               |                | $             | 2,803         
|Gross profit               |               |                |               | 1,597         
|Operating loss             |               |                |               | (3,689        
|Net loss                   |               |                |               | (3,551        
|Basic and diluted net loss |               |               
|per share                  |               |                | $             | (0.27         

The results of the fourth quarter of
2002 include a $3,750,000 settlement of litigation which the Company expensed in that
period. (See Note 15.)

54

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