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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, 2004

# 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 or other jurisdictionof incorporation or organization) | (IRS Employer Identification No.)

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

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

Securities registered pursuant to Section 12(b) of the Act: None
Securities 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]

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

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, 2004 was $118,383,145.

As of February 4, 2005, the number of shares outstanding of the
registrants common stock was 14,352,547.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrants Proxy Statement for its 2005 Annual Meeting
of Shareholders to be held on April 19, 2005 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

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

| |  |  | D-Stat Dry hemostatic bandage, a topical pad with a bandage used to control surface bleeding,
| | - |  | ----------------------------------------------------------------------------------------------

| |  |  | Pronto extraction catheter, a mechanical system for the
removal of soft thrombus from arteries,
| | - |  | ------------------------------------------------------------------------------------------------

| |  |  | Vari-Lase® endovenous laser, a laser and procedure kit used
for the treatment of varicose veins,
| | - |  | ------------------------------------------------------------------------------------------------

| |  |  | 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,
| | - |  | -----------------------------------------------------------------------------------

| |  |  | Langston dual lumen pigtail catheter, used to measure
intravascular pressure gradients,
| | - |  | ----------------------------------------------------------------------------------------

| |  |  | MAX-Support abdominal retraction belt, used to allow femoral
access in obese patients, 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.

We currently 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 2005 in the United States include the following medical devices:

| |  |  | Skyway exchange catheter and the SideKick dual access
catheter, both specialty-purpose catheters designed for interventional cardiology which address market opportunities we estimate
at between $1 million and $5 million per year.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | D-Stat Foam hemostat, a resorbable version of our D-Stat Dry
which we expect to launch in 2005 with a limited topical indication, and expect to expand to a much broader surgical indication by
the end of 2006. This resorbable version of the D-Stat Dry addresses a market in excess of $100 million annually for a surgical
thrombin-based resorbable pad hemostat.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Interventional Cardiology and Interventional Radiology Industry Background

Over 60 million
Americans have one or more types of cardiovascular diseasediseases of the heart and blood vessels. Cardiovascular disease is
the number one cause of death in the United States and is replacing infectious disease as the worlds pre-eminent health
risk. Advances in medicine have enabled physicians to perform an increasing number of diagnostic and therapeutic treatments of
cardiovascular disease using minimally invasive methods, such as catheters placed inside the arteries, instead of highly invasive
open surgery. Cardiologists and radiologists use diagnostic procedures, such as angiography, to confirm, and interventional
procedures, such as angioplasty and stenting, to treat diseases of the coronary and peripheral arteries. Based on industry
statistics, we estimate that cardiologists and radiologists performed over nine million diagnostic and interventional
catheterization procedures worldwide in 2004. 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 2004 exceeded $5 billion
worldwide.

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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. In addition to our Duett sealing device, three other invasive sealing
devices have received FDA approval and are currently being marketed around the world. In the aggregate, over $380 million of the
five FDA-approved invasive sealing devices were sold worldwide in 2004, 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 annually.

# 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 and 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 $40 million in 2004.

We believe that the D-Stat
Dry has many potential uses beyond this initial application, and to date, we have developed four variations of our D-Stat Dry
 the D-Stat 2Dry, the D-Stat Clamp, the D-Stat Radial and the D-Stat Dry 3x3. The D-Stat 2 Dry is a convenient 2-bandage
version of the D-Stat Dry used in the dialysis market. The D-Stat Clamp utilizes our D-Stat Dry pad and is configured for
attachment to standard compression devices.

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

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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.

At the end of the first
quarter of 2004 we received regulatory clearance in the United States for the D-Stat Dry 3x3 bandage. The 3x3 version of the
D-Stat Dry, which is designed for use in trauma indications, continues to proceed through clinical evaluations and discussions
with potential corporate distribution partners. The 3x3 version of the D-Stat Dry is a bandage that does not require mixing or
special storage requirements and it can be quickly applied to even severely bleeding wounds. During the fourth quarter of 2004, we
advanced discussions with two potential corporate partners that have expressed an interest in branding and distributing this
product for us on an exclusive or non-exclusive basis, pending further due diligence and negotiations. We also have conducted
clinical evaluations at 11 U.S. trauma centers and four U.S. military operations in Iraq that requested the product directly from
us. To date, we have received feedback on approximately 60 successful deployments, with no adverse events reported, all from the
U.S. trauma centers.

# Pronto Extraction Catheter

Our Pronto product consists
of an extraction catheter with a proprietary distal tip and large extraction lumen that can be delivered into arteries to
mechanically remove blood clots using simple vacuum suction. The Pronto extraction catheter was initially developed by Dr. Pedro
Silva of Milan, Italy, who exclusively licensed the design to us in 2002. We received CE mark approval and commenced international
sales of the Pronto in August 2003, and received FDA clearance in December 2003 and commenced sales in the United States in early
2004. In the fourth quarter of 2004 we completed development work on the third generation design of the Pronto, called the Pronto
V3, which we expect to launch in the United States in the third quarter of 2005. We believe this new version of the Pronto
incorporates several improvements that physicians have requested, and we believe there will be a very substantial boost to our
Pronto sales starting in the fourth quarter of 2005. We believe that the market size for the removal of soft thrombus is greater
than $100 million per year worldwide.

# 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 United States 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. During
the fourth quarter of 2004 the Center for Medicare and Medicaid Services (CMS) published the Medicare Physicians Fee Schedule
which established favorable reimbursement rates for the endoveneous laser procedure starting January 1, 2005. Private insurance
also has continued its favorable trend with coverage decisions which have caused more physicians to add this procedure to their
practice. We believe the current U.S. market size for treating varicose veins using endovenous therapy is greater than $60 million
per year.

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. During 2004 we developed and commenced sales of our Auto-Fill syringe and Vari-Lase procedure
packs as accessory products to the Vari-Lase product line. The Auto-Fill

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syringe is an easy fluid delivery system for tumescent local anesthesia. The
Vari-Lase Procedure Pack is a complete sterile pack of accessories designed for endovenous laser procedures. 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 used in other interventional medical procedures.

# Duett Sealing Device

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 procoagulant 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.

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.

# D-Stat Flowable Hemostat

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 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.

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 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. In December 2004 we completed enrollment in a 268 patient
clinical study of the use of the D-Stat Flowable in the hemostasis of prepectoral pockets created in pacemaker and defibrillator
implantations. We expect that follow-up should be completed in this Pocket Protector clinical study and, assuming
satisfactory data, the PMA will be submitted to the FDA by the middle of 2005. We estimate that the U.S. market opportunity for
this prepectoral pocket indication is greater than 100,000

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procedures (or $10 million) annually. We also believe that the D-Stat
Flowable has application for use 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.

# Langston Dual Lumen Pigtail Catheter

At the end of the third
quarter of 2004 we received regulatory clearance in the United States for the Lanston dual lumen pigtail catheter. The Langston
catheter is used for the precise measurement of intravascular pressure gradients, primarily measured to diagnose aortic valve
stenosis. We believe our Langston catheter is the only dual lumen pigtail catheter on the U.S. market that can be used for this
intended indication.

Our first configuration of
the Langston catheter is in an 8 French size. Due to customer requests, we have recently submitted our 510(k) application for a
smaller 7 French size of the product that we expect will be launched during the second quarter of 2005, and we have prototyped a 6
French size that we believe we could have on the U.S. market by the end of 2005. We believe the U.S. market potential for all of
the Langston catheter product line is $10 million annually.

# MAX-Support abdominal retraction belt

During the first quarter of
2005 we launched the MAX-Support abdominal retraction belt. This product is a tape-free retraction system to expose the femoral
artery puncture site in obese patients. Nationwide, approximately 7% of catheterization laboratory patients require taping of
their belly apron to allow visualization of the femoral crease for the purpose of gaining access for the catheterization. The
Max-Support belt is a tape-free alternative that avoids the discomfort, inefficiencies and time involved in the current practice
of taping. We believe the market potential for the MAX-Support belt is approximately $1 million annually with no existing
competition.

# Acolysis Ultrasound Thrombolysis System

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.

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 eight 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 have been favorable.

Our international sales
efforts on the Acolysis product began in 2002 on a limited basis. We are in the process of working on our next generation Acolysis
ultrasound thrombolysis system. Once we complete our improvement on the current system we will plan and structure a clinical study
in the United States 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 2007.

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# Business Strategy

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

| |  |  | Maintain and Improve our Clinically-Oriented Direct Sales Force
in the United States.   During the third quarter of 2000 we commenced sales of our 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 knowledge and training are key
factors 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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Expand our Existing Products to Our Existing
Market.   Since the end of 2002 we have received clearance for a total of five new product lines to be sold in
the United States through our existing direct sales force to our existing markets. Each of these product lines has generated
material sales, and we believe that each of these product lines has the potential to generate even more sales during 2005 and
beyond.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Develop New Devices to be Sold Through our Direct Sales Force
to our Existing Customers.   We intend to continue to leverage our direct sales force by bringing additional
products to the interventional physician. During 2005 we expect to launch three new product lines in the U.S.  the Skyway
exchange catheter, the SideKick dual access catheter and the D-Stat Foam hemostat, with additional products being developed for an
expected 2006 launch.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Explore Corporate Relationships to Augment our Direct Sales
Force.   In markets for our products beyond the interventional physician (such as the trauma market for our
D-Stat Dry 3x3 product) 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,
2004, our direct sales force consisted of approximately 57 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 is able to sell each of our new
products to the same customer base.

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

We are focused on building
market awareness and acceptance of our products. Our marketing 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.

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Our international sales and
marketing strategy has been to sell to interventional cardiologists and interventional radiologists through established
independent distributors in major international markets, subject to required regulatory approvals. In Germany, we created our
wholly-owned subsidiary Vascular Solutions GmbH to sell directly to customers in the German market beginning in the fourth quarter
of 2000. In most of the other major developed markets our products are currently marketed through independent distributors. 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 directly
competitive products. Our independent distributors purchase our products from us at a discount from list price and resell the
device to hospitals and clinics. Sales to international distributors are denominated in United States dollars. The end-user price
is determined by the distributor and varies from country to country.

# New Product Development

Our research and development
staff is currently focused on developing new products to sell to our existing customer base through our direct sales force and on
developing next generation versions of our existing products. We incurred expenses of $3,400,864 in 2004, $3,670,935 in 2003 and
$3,227,538 in 2002 for research and development activities. To further leverage our efficiencies, our research and development
group continues to develop in-house capabilities to manufacture some of the components currently produced by outside vendors.

In addition to our normal
research and development expenses, in the fourth quarter of 2004 we incurred $210,069 in thrombin qualification expenses relating
to our project to qualify a new source of thrombin. On October 18, 2004, we entered into a supply agreement with Sigma-Aldrich
Fine Chemicals, an operating division of Sigma-Aldrich, Inc. (Sigma) for the supply of thrombin for use in our hemostatic
products. The Sigma contract is the start of our plan to fully qualify a new source of thrombin and to bring the new thrombin
through the regulatory process over the next two years. We expect our total estimated expenditures will be $6.1 million to
complete this project, including the costs associated with the Sigma agreement. Of the total expenditures, we expect approximately
$3.3 million will be for development expenses, $0.3 million will be for capital equipment and $2.5 million will be for the
purchase of inventory of thrombin. The purchase of the $2.5 million in thrombin is expected to be used in our hemostatic products
beginning in 2007. Following the qualification of the Sigma thrombin, we believe we can launch several additional new
thrombin-based surgical products into the existing $200 million annual U.S. thrombin market, which currently has only one
competitor.

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 most recently in April 2004 for compliance with the FDAs quality
systems regulations with no deficiencies noted. In March 2003 we moved to our current facility, and the FDA approved our new
facility in May 2003, also with no deficiencies noted.

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

8

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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.
As a result of the favorable price provisions in our current thrombin supply agreement, we expect to increase our inventory of
thrombin by approximately $3 million during the second and third quarters of 2005, which we believe will be sufficient for all of
our thrombin requirements through the end of 2006. To date, we have not experienced any significant adverse effects resulting from
shortages of components.

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

# Competition

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

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

| |  |  | The Syvek Patch, manufactured and marketed by Marine Polymer Technologies, Inc.
| | - |  | --------------------------------------------------------------------------------

| |  |  | The Closur-P.A.D., manufactured by Scion Cardiovascular and distributed by Medtronic, Inc.
| | - |  | -------------------------------------------------------------------------------------------

| |  |  | The Chito-Seal, distributed by Abbott Vascular, Inc. a division of Abbott Laboratories
| | - |  | ---------------------------------------------------------------------------------------

The Pronto extraction
catheter competes in the market segment for removal of thrombus from the arterial system. There are many companies that are
selling or have developed products in this segment, including Possis Medical, Medtronic, Boston Scientific and ev3.

We are aware of five
companies that sell a product for the endovenous laser treatment of varicose veins. These companies are AngioDynamics, biolitec,
Dornier MedTech, CoolTouch and Diomed. Each of these companies products contain the same components for the therapy but
differ in procedural training, laser wavelength, custom-designed features and customer support. In addition, VNUS Medical
Technologies sells a radiofrequency alternative to the laser for the treatment of varicose veins.

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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9

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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.

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 Cosmetic Act. The FDA classifies medical devices
into one of three classes based upon controls the FDA considers necessary to reasonably ensure their safety and effectiveness.
Class I devices are subject to general controls such as labeling, adherence to good manufacturing practices and maintenance of
product complaint records, but are usually exempt from premarket notification requirements. Class II devices are subject to the
same general controls and also are subject to special controls such as performance standards, and FDA guidelines, and may also
require clinical testing prior to approval. Class III devices are subject to the highest level of controls because they are used
in life-sustaining or life-supporting implantable devices. Class III devices require rigorous clinical testing prior to their
approval and generally require a premarket approval (PMA) 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 PMA requirements. In May 1997, the FDA determined that the review of the
Duett sealing device would be delegated to the Center for Devices and Radiological Health area of the FDA, with a consulting
review by the Center for Biologic Evaluation and Research. During 1998 and 1999, we received approval of our IDE application 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

10

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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, D-Stat Clamp, Pronto, Langston Catheter 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. We received FDA
clearance for these products in the following months:

| |  |  | D-Stat Flowable hemostat  February 2002
| | - |  | ----------------------------------------

| |  |  | D-Stat Dry hemostatic bandage  September 2003
| | - |  | ----------------------------------------------

| |  |  | D-Stat Radial hemostat band  September 2003
| | - |  | --------------------------------------------

| |  |  | Vari-Lase endovenous laser products  June & November
2003
| | - |  | ----------------------------------------------------------

| |  |  | Pronto extraction catheter  January 2004
| | - |  | -----------------------------------------

| |  |  | D-Stat Dry 3x3  March 2004
| | - |  | ---------------------------

| |  |  | D-Stat Clamp accessory  June 2004
| | - |  | ----------------------------------

| |  |  | Langston dual lumen pigtail catheter  September 2004
| | - |  | -----------------------------------------------------

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

International

The European Union has
adopted rules which require that medical products receive the right to affix the CE mark, an international symbol of adherence to
quality assurance standards and compliance with applicable European medical device directives. As part of the CE 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 hemostats  September 2003
| | - |  | -------------------------------------------------------

| |  |  | Vari-Lase endovenous laser procedure kit  December 2003
| | - |  | --------------------------------------------------------

| |  |  | Acolysis probe internal manufacturing  November 2003
| | - |  | -----------------------------------------------------

| |  |  | Acolysis controller internal manufacturing  January 2005
| | - |  | ---------------------------------------------------------

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 Pronto extraction catheter for commercial sale in Japan, which we expect will be completed in the first half of 2005.

11

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# 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.
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 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 five additional United States patents issued and
seven additional patents pending concerning new versions of our Duett sealing device, our Pronto catheter, our Langston dual lumen
pigtail catheter, our MAX-Support abdominal retraction belt 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, one of our competitors in the endovenous laser therapy market (Diomed) has brought five
separate intellectual property lawsuits against its competitors, including two against us. The interpretation of patents

12

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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, MAX-Support, Langston, SideKick, Skyway, 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, 2004, we
had 144 full time employees. Of these employees, 32 were in manufacturing activities, 72 were in sales and marketing activities,
12 were in research and development activities, 17 were in regulatory, quality assurance and clinical research activities and 11
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.

# Executive Officers of the Registrant

The executive officers of the
Company as of February 4, 2005 are as follows:

|Name              | Age |    | Position
|----------------- | --- | -- | --------
|Howard Root       |     | 44 |         
|Michael Nagel     |     | 42 |         
|Deborah Neymark   |     | 48 |         
|James Quackenbush |     | 46 |         
|Gregg Sutton      |     | 45 |         
|James Hennen      |     | 32 |         

Howard Root has
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 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

13

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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
Neymark has 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.

Gregg Sutton
joined us as our Vice President of Research & Development in October 2004. Prior to joining us, Mr. Sutton served as Vice
President of Research & Development with AtriTech, Inc., a development stage interventional medical device company since
January 2000. From 1998 to 2000, he was Vice President of Research & Development of AngioGuard, Inc., an interventional
medical device company that was acquired by Johnson & Johnson in 2000. In 1990 Mr. Sutton co-founded Navarre Biomedical, Inc.,
a manufacturer of interventional radiology products that was acquired by CR Bard in 1997. Prior to 1990 Mr. Sutton held product
engineering positions at St. Jude Medical, Claris Medical and Daig Corporation. Mr. Sutton received a B.S. in Mechanical
Engineering from the University of Minnesota.

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.

# Available Information

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

14

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# 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 and 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 we may require additional space for our expanding operations before the expiration of this lease. We believe that
there is suitable space available in the local market (although not in our current facility) at reasonable rates that are
available to us if we need expansion space prior to the end of our lease.

# ITEM 3.   LEGAL PROCEEDINGS

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 device, 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 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.

On December 11, 2003, we 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 our Vari-Lase endovenous laser procedure kit we
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 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. Our insurance carrier has accepted their tender of this claim and is
defending this lawsuit. It is not possible to predict the timing or outcome of this 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.

On March 4, 2004, we were
named as the defendant in an intellectual property lawsuit brought by Diomed, Inc. in the United States District Court for the
District of Massachusetts. The complaint requested a judgment that our Vari-Lase procedure kit and Vari-Lase laser console
infringe on a single patent held by Diomed, Inc. and asked for relief in the form of an injunction that would prevent us from
selling our Vari-Lase products, compensatory and treble damages caused by the manufacture and sale of our product, and other
costs, disbursements and attorneys fees. 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. It is not possible to predict the timing
or outcome of this litigation, including whether it will affect our ability to sell our Vari-Lase products, or to estimate the
amount or range of potential loss, if any.

15

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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 quarter ended December 31, 2004.

16

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# PART II

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

Our
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
|-------------- | ---- | ------ | ---
|2004           |      |        |    
|First Quarter  |      | 10.690 |    
|Second Quarter |      | 14.740 |    
|Third Quarter  |      | 11.100 |    
|Fourth Quarter |      | 10.750 |    
|              
|2003           |      |        |    
|First Quarter  |      | 1.160  |    
|Second Quarter |      | 2.280  |    
|Third Quarter  |      | 5.880  |    
|Fourth Quarter |      | 6.420  |    

# Holders

As of December 31, 2004, we
had 181 shareholders of record. Such number of record holders does not reflect shareholders who beneficially own common stock in
nominee or street name.

# Dividends

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

# ITEM 6.   SELECTED FINANCIAL DATA

The following selected
financial data as of December 31, 2004 and 2003 and for the three years ended December 31, 2004, 2003 and 2002 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, 2002, 2001 and 2000 and for the fiscal years ended December 31, 2001 and 2000 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.

17

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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           |                        
|Thrombin qualification               |                        
|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                   |                        
|                                    
|
|
|
|Balance Sheet Data:                  |                        
|Cash, cash equivalents and           |                        
|available-for-sale securities.       |                        
|Working capital                      |                        
|Total assets                         |                        
|Long-term debt                       |                        
|Total shareholders equity           |                        

18

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

The following discussion of
our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and
Notes thereto, and the other financial information included elsewhere in this Form 10-K 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 our business. These forward-looking statements and other forward-looking statements made elsewhere in this
document are made in reliance upon safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The following
discussion sets forth certain factors we believe could cause actual results to differ materially from those contemplated by the
forward looking statements.

# Overview

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

Since 2003, we have launched
four new interventional product categories:

| |  |  | D-Stat Dry Hemostatic Bandage.   We launched
this product in September 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Vari-Lase endovenous laser procedure kit and laser
console.   We launched the procedure kit in the third quarter of 2003 and the laser console in the first
quarter of 2004. The Vari-Lase product is a treatment for superficial venous reflux, otherwise known as varicose veins.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Langston dual lumen pigtail catheter.   We
received regulatory clearance for this product in September 2004 and launched this product in the fourth quarter of 2004. The
Langston catheter is used to measure the precise measurement of aortic stenosis.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We  believe these four
new recently launched product categories together with sales of our existing Duett, D-Stat Flowable and Acolysis products, will
result in continued substantial revenue growth in the range of $35 million to $40 million for 2005. We also believe that these new
products will increase our gross margin percent to approximately 71% to 73% during 2005.

# Results of Operations

Year ended December 31, 2004 compared to year ended December 31, 2003

Net sales increased to
$22,265,000 for the year ended December 31, 2004 from $11,804,000 for the year ended December 31, 2003. Approximately 89% of our
net sales for the year ended December 31, 2004 were to customers in the United States and 11% of the net sales were to customers
in international markets. Net sales by product category were as follows:

19

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| |  |  | Net sales of the D-Stat Dry were $8,831,000 for the year ended
December 31, 2004 compared to $1,085,000 for the year ended December 31, 2003. Our D-Stat Dry product was launched at the end of
the third quarter of 2003. Through December 31, 2004, we have sold our D-Stat Dry to 574 of the estimated 3,000 cardiac and
interventional radiology labs in the United States.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Net sales of the Pronto were $3,051,000 for the year ended
December 31, 2004 compared to $97,000 for the year ended December 31, 2003. 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 have sold our Pronto to 450 accounts in the United States through December 31, 2004.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Net sales of Vari-Lase products were $2,662,000 for the year ended
December 31, 2004 compared to $255,000 for the year ended December 31, 2003. Our Vari-Lase procedure kit was launched during the
third quarter of 2003 and our Vari-Lase laser console was launched during the first quarter of 2004. We have sold our Vari-Lase
kits to 172 accounts in the United States through December 31, 2004.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Net sales of our Duett sealing device were $5,973,000 for the year
ended December 31, 2004 compared to $8,995,000 for the year ended December 31, 2003. We expect Duett sales to continue to decline
at a rate of between 20% to 30%, year over year, as we continue to harvest this product and focus on our new higher margin
products.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Net sales of D-Stat Flowable increased to $1,441,000 for the year
ended December 31, 2004 compared to $1,187,000 for the year ended December 31, 2003, a 21% increase. Our reorder rate for the
D-Stat Flowable in 2004 compared to 2003 has increased to 63% from 58%.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Net sales of Langston dual lumen pigtail catheter were $133,000
for the year ended December 31, 2004 compared to no sales for the year ended December 31, 2003. In September 2004 we launched the
Langston dual lumen pigtail catheter.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Net sales of Acolysis products were $174,000 for the year ended
December 31, 2004 compared to $185,000 for the year ended December 31, 2003. The Acolysis products are only sold in international
markets.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Gross profit as a percentage
of net sales increased to 70% for the year ended December 31, 2004 from 61% for the year ended December 31, 2003. Our selling mix
continues to change to our higher margin products such as our D-Stat Dry which has gross margins greater than 80% and our Pronto
which has gross margins in excess of 75%. We expect gross margins to stabilize in 2005 to approximately 71% to 73%.

Research and development
expenses decreased 7% to $3,401,000 for the year ended December 31, 2004 from $3,671,000 for the year ended December 31, 2003. The
decrease was related to less outside project spending in 2004 compared to 2003. We expect our research and development expenses to
be approximately $800,000 to $1,000,000 per quarter in 2005 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.

Clinical and regulatory
expenses increased 24% to $1,906,000 for the year ended December 31, 2004 from $1,536,000 for the year ended December 31, 2003.
The increase was the result of increased clinical study activity, increased FDA fees and increased number of employees compared to
2003. During 2004 our clinical studies consisted of the Pocket Protector study for a new indication of our D-Stat
Flowable product and the D-Stat Dry study to obtain clinical data to support growing sales of the D-Stat Dry. Clinical and
regulatory expenses fluctuate due to the timing of clinical and marketing studies. We expect clinical and regulatory expenses to
be approximately $500,000 to $600,000 per quarter in 2005.

20

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Sales and marketing expenses
increased 18% to $11,360,000 for the year ended December 31, 2004 from $9,646,000 for the year ended December 31, 2003. The
increase in sales and marketing expenses is the direct result of our increase in our direct sales force to 57 employees at the end
of 2004 compared to 47 as of December 31, 2003. We expect to add approximately 10 field sales employees during 2005 to complete
our geographic coverage of the United States. As a result, we expect our sales and marketing expenses to increase to approximately
$3,200,000 to $3,500,000 per quarter in 2005.

General and administrative
expenses increased 10% to $2,138,000 for the year ended December 31, 2004 from $1,942,000 for the year ended December 31, 2003.
The increase was primarily the result of higher legal fees relating to the Diomed litigation (see Legal Proceedings in
Item 3 of Part I of this Form 10-K) along with higher business insurance in 2004 compared to 2003. We expect general and
administrative expenses to be approximately $550,000 to $650,000 per quarter in 2005.

Thrombin qualification
project expenses were $210,000 for the year ended December 31, 2004 compared to no expenses for the year ended December 31, 2003.
We expect the total remaining expenses associated with our qualification of the new source of thrombin to be approximately $3.1
million to be incurred over the next two years, with approximately $1.8 million incurred in 2005 and $1.3 million incurred in
2006.

Amortization of purchased
technology was $218,000 for the year ended December 31, 2004 and $218,000 for the year ended December 31, 2003. 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
$68,000 for the year ended December 31, 2004 from $150,000 for the year ended December 31, 2003 primarily as a result of lower
interest rates and lower cash balances.

# Results of Operations

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

Net sales decreased modestly
to $11,804,000 for the year ended December 31, 2003 from $12,101,000 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:

| |  |  | 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 sold our D-Stat Dry to 187 of the estimated 3,000 cardiac and interventional radiology labs in the
United States.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Net sales of Vari-Lase products 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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 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. We expect Duett sales to continue to decline
at a rate of between 20% to 30%, year over year, as we continue to harvest this product.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

21

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| |  |  | 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 remained steady at 58%.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------

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%.

Research and development
expenses increased 14% to $3,671,000 for the year ended December 31, 2003 from $3,228,000 for the year ended December 31, 2002.
The increase was directly related to our increased activity in launching four new products in 2003 and the continued work on the
long term research and development projects. Research and development expenses fluctuate due to outside project spending.

Clinical and regulatory
expenses increased 14% to $1,536,000 for the year ended December 31, 2003 from $1,348,000 for the year ended December 31, 2002.
The expected increase was the result of the approval of the four new products in the second half of 2003 as well as the
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.

Sales and marketing expenses
decreased 19% to $9,646,000 for the year ended December 31, 2003 from $11,964,000 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 drove sales and provided
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.

General and administrative
expenses decreased 10% to $1,942,000 for the year ended December 31, 2003 from $2,167,000 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.

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 $218,000 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 $150,000 for the year ended December 31, 2003
from $507,000 for the year ended December 31, 2002 primarily as a result of a reduced cash balance and lower interest rates.

22

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# 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, 2004, we
had net operating loss carryforwards of approximately $57,865,000 for U.S. federal income tax purposes that begin to expire in the
year 2013. As of December 31, 2004, we also had federal and state research and development tax credit carryforwards of
approximately $1,598,000 that begin to expire in the year 2013. As of December 31, 2004, we also had a foreign tax loss
carryforward of approximately $2,358,000 that do 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.

# 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, 2004, we have sold common stock and preferred stock generating aggregate net proceeds of approximately $76.6 million.
At December 31, 2004, we had $7,184,000 in cash, cash equivalents and available-for-sale securities on-hand compared to $5,885,000
at December 31, 2003.

During the year ended
December 31, 2004, we used $4,115,000 to fund operating activities. The cash used in operating activities was primarily used to
fund our net loss for the period of $3,508,000 and an increase in accounts receivable of $1,723,000, which was offset by
depreciation and amortization of $692,000. The increase in accounts receivable is due to the increase in sales of 89% in 2004 from
2003. During 2004 we generated proceeds of $2,120,000 in investing activities, primarily from the net sales of investment
securities of $3,020,000, offset by net equipment purchases of $900,000. Also during 2004 we generated $6,212,000 in financing
activities, primarily from $5,868,000 we received through the sale of common stock. On March 9, 2004, we sold 888,900 shares of
our common stock at an offering price of $6.75 per share through a private placement. Our net proceeds from the offering were
approximately $5,594,000.

During the fourth quarter of
2004, we renewed our credit facility with Silicon Valley Bank and increased the line of credit to $5.0 million. 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 $11.0 million and a liquidity coverage of not
less than 1.25 to 1.00. We were in compliance with these covenants at December 31, 2004. As of December 31, 2004, we had no
outstanding balance on the line of credit balance and the availability was $3.1 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 the second and third quarters of 2005, we intend to increase our purchases of thrombin to benefit from the
pricing provisions of the agreement, which we expect will increase our inventory of thrombin by approximately $3.0 million. We
believe that these purchases will satisfy our thrombin requirements for all of 2005 and 2006.

On October 18, 2004, we
entered into a supply agreement with Sigma-Aldrich Fine Chemicals, an operating division of Sigma-Aldrich, Inc. (Sigma) for the
supply of thrombin. Pursuant to the terms of the agreement, we will be paying for certain development costs of Sigma to allow
Sigma to produce thrombin. We will pay Sigma $570,000 for its development and qualification costs, $182,000 for capital equipment
and $1,725,000 for the first three lots of thrombin. The payments are based on certain milestones over a two year

23

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period. We do not have any minimum purchase requirements under the contract;
however, if we purchase less than three lots of thrombin in any year Sigma will be released from its agreement not to sell
thrombin in or as a component of a hemostatic product for medical use, and Sigma will have the right to terminate the contract on
30 days notice.

The Sigma contract is the
start of our plan to fully qualify a new source of thrombin and to bring the new thrombin through the regulatory process by the
end of 2006. We expect total estimated expenditures of $6.1 million to complete this project (including the payments to Sigma),
with approximately $3.3 million in expenses, $0.3 million in capital equipment purchases and $2.5 million in thrombin inventory
purchases. We expect to utilize the thrombin inventory in sales of our hemostatic products starting in 2007.

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 were 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 fulfilled this obligation during 2004.

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

The following table
summarizes our contractual cash commitments as of December 31, 2004:

|                                   | Payments Due by Period
|---------------------------------- | ----------------------
|                                   |                       
|
|                                   |                       
|                                  
|Facility Operating Lease           |                       
|Sigma Contract Commitment          |                       
|                                   |                       
|Total Contractual Cash Obligations |                       
|                                   |                       

Principally due to the
thrombin inventory purchases and the Sigma thrombin qualification project, we currently anticipate that we will continue to
experience a negative cash flow until at least the fourth quarter of 2005, at which time we project that we will become cash flow
neutral. We currently believe that our working capital of $11.8 million, anticipated cash from product sales and, if needed, our
$5.0 million credit facility with Silicon Valley Bank will be sufficient to meet our operating and capital requirements until we
reach cash flow neutral in the fourth quarter of 2005. 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; the cost and progress or our thrombin qualification 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.

24

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# 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. The estimated value of excess, obsolete and slow-moving inventory as well as
inventory with a carrying value in excess of its net realizable value is established by us on a quarterly basis through review of
inventory on hand and assessment of future demand, anticipated release of new products into the market, historical experience and
product expiration. Our stated value of inventory could be materially different if demand for our products decreased because of
competitive conditions or market acceptance, or if products become obsolete because of advancements in the industry.

Revenue Recognition

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

We 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, 2004, this reserve was $20,000 compared to $20,000 at December 31, 2003.
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, 2004, this reserve was $160,000 compared to $140,000 at December 31,
2003. 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.

25

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Warranty Costs

We provide a warranty for
certain products against defects in material and workmanship for periods of up to 24 months. We record a liability for warranty
claims at the time of sale. The amount of the liability is based on the amount we are charged by our original equipment
manufacturer to cover the warranty period. The original equipment manufacturer includes a year warranty with each product sold to
us. We record a liability for the uncovered warranty period offered to a customer, provided the warranty period offered exceeds
the initial one year warranty period covered by the original equipment manufacturer. At December 31, 2004, this warranty provision
was $33,000 compared to $0 at December 31, 2003. If the assumptions used in calculating the provision were to materially change,
resulting in more defects than anticipated, an additional provision may be required.

Income Taxes

The carrying value of our net
deferred tax assets assumes that we will be able to generate sufficient taxable income in the United States 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, 2004, we recorded a $26.4 million
valuation allowance related to our net deferred tax assets of $26.4 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 December 2004, the
Financial Accounting Standards Board (FASB) issued Statement No. 123R, Share-Based Payment (SFAS 123R), which requires
companies to measure and recognize compensation expense for all stock-based payments at fair value.  SFAS 123R is effective
for all interim periods beginning after June 15, 2005.  Early adoption is encouraged and retroactive application of the
provisions of SFAS 123R to the beginning of the fiscal year that includes the effective date is permitted, but not required. 
We are currently evaluating the impact of SFAS 123R our financial position and results of operations.  See Note 2 for
information related to the pro forma effects on our reported net loss and net loss per share of applying the fair value
recognition provisions of the previous Statement of Financial Accounting Standards (SFAS) 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.

# 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:

26

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| |  |  | 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 limited
experience with sales of our D-Stat Dry hemostatic bandage, Pronto extraction catheter, Vari-Lase endovenous laser and Langston
catheter 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, 2004, we had
$7.2 million in cash, cash equivalents and marketable securities and a working capital of $11.8 million. During 2004, our
operating activities resulted in the use of $4.1 million of cash. 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 unable to take advantage of business opportunities, or we
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, 2004, we had an accumulated deficit of $63.2 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 net losses through at least the first quarter of 2005. 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. We also are the subject of two intellectual property lawsuits concerning our Vari-Lase products. 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.

27

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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 terminates in May 2005. Because it requires FDA approval, establishing our new supplier for thrombin requires a
lead-time of at least two years and involves significant additional costs. The failure by us to complete our thrombin
qualification project on time and on budget, or the loss of any other key vendor, may limit our ability to manufacture our Duett,
D-Stat Flowable and D-Stat Dry 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;
| | - |  | ---------------------------------------------------------------

| |  |  | 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;
| | - |  | -------------------------------------------------------------------------

28

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| |  |  | 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. Each of these companies has:

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

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

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

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

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

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

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

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

Our international sales are
subject to several risks, including:

29

---

| |  |  | 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 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

30

---

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.

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.

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.

We do not have any
indebtedness as of December 31, 2004. If we were to borrow from our revolving credit agreement, we would be exposed to changes in
interest rates. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate
changes.

31

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# ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Financial
Statements and Notes thereto required pursuant to this Item begin on page 38 of this Annual Report on Form 10-K.

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

No additional disclosure is
required regarding our recent change in independent accountants, as disclosed in our Form 8-K filed on October 1, 2004
and Form 8-K/A filed on October 22, 2004.

# ITEM 9A.   CONTROLS AND PROCEDURES

# Evaluation of disclosure controls and procedures.

Under the supervision and
with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Exchange Act of 19934 (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, 2004, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f)
under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.

# Managements Report on Internal Control Over Financial Reporting.

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

Under the supervision and
with the participation of our management, including our chief executive officer and chief financial officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting based on the framework in
Internal Control  Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our evaluation under the framework in
Internal Control  Integrated Framework, our management concluded that our
internal control over financial reporting was effective as of December 31, 2004.

Our managements
assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by
Virchow, Krause & Company, LLP, an independent registered public accounting firm, as stated in their report which is included
herein on page 42.

# ITEM 9B.   OTHER INFORMATION

No information was required
to be disclosed in a report on Form 8-K in the fourth quarter that was not so disclosed.

32

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# PART III

# ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Incorporated herein by
reference to the Sections under the headings Election of Directors, Committees of the Board of Directors
and Section 16(a) Beneficial Ownership Reporting Compliance contained in the Proxy Statement for our Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission within 120 days of the close of the year ended December 31,
2004.

See Item 1 of Part I hereof
for information regarding our executive officers.

We have adopted a code of
ethics that applies to all of our directors, officers (including our chief executive officer, chief financial officer, chief
accounting officer, and any person performing similar functions) and employees. We have made our Code of Ethics available by
filing it as Exhibit 14 with our 2003 Annual Report on Form 10-K.

# ITEM 11.   EXECUTIVE COMPENSATION

Incorporated herein by
reference to the Sections under the headings Director Compensation and Executive Compensation 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, 2004.

# 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, 2004.

# 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, 2004.

33

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# PART IV

# ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

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

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

| |  | (i) |  | Reports of Independent Registered Public Accounting Firms
| |  | --- |  | ---------------------------------------------------------

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

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

| |  | (iv) |  | Consolidated Statements of Changes in Shareholders Equity
| |  | ---- |  | ----------------------------------------------------------

| |  | (v) |  | Consolidated Statements of Cash Flows
| |  | --- |  | -------------------------------------

| |  | (vi) |  | Notes to Consolidated Financial Statements
| |  | ---- |  | ------------------------------------------

| | (2) |  | Financial Statement Schedules
| | --- |  | -----------------------------

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

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

|ExhibitNumber | Description                                                                                                                                                                                                                                                                                            
|------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1           | Amended and Restated Articles of Incorporation of Vascular Solutions, Inc. (incorporated by reference to Exhibit 3.1 to Vascular Solutions Form 10-Q for the quarter ended September 30, 2000).                                                                                                       
|3.2           | Bylaws of Vascular Solutions, Inc. (incorporated by reference to Exhibit 3.2 of Vascular Solutions' Registration Statement on Form S-1 (File No. 333-84089)).                                                                                                                                          
|4.1           | Specimen of Common Stock certificate (incorporated by reference to Exhibit 4.1 of Vascular Solutions' Registration Statement on Form S-1 (File No. 333-84089)).                                                                                                                                        
|4.2           | Form of warrant dated January 31 and February 14, 1997 issued to representatives of Miller, Johnson & Kuehn, Incorporated (incorporated by reference to Exhibit 4.2 of Vascular Solutions Registration Statement on Form S-1 (File No. 333-84089)).                                                   
|4.3           | Form of warrant dated December 29, 1997 issued to representatives of Miller, Johnson &Kuehn, Incorporated (incorporated by reference to Exhibit 4.3 of Vascular SolutionsRegistration Statement on Form S-1 (File No. 333-84089)).                                                                    
|4.4           | Amended and Restated Investors' Rights Agreement dated December 9, 1998, by and between Vascular Solutions, Inc. and the purchasers of Series A and Series B preferred stock (incorporated by reference to Exhibit 4.4 of Vascular Solutions Registration Statement on Form S-1 (File No. 333-84089)).
|10.1          | Lease Agreement dated August 30, 2002 by and between First Industrial, L.P. as Landlord and Vascular Solutions, Inc. as Tenant (incorporated by reference to Exhibit 10.1 of Vascular Solutions' Form 10-Q for the quarter ended September 30, 2002).                                                  
|10.2          | Mutual and General Release dated November 9, 1998 by and between Vascular Solutions, Inc., Dr. Gary Gershony and B. Braun Medical, Inc. (incorporated by reference to Exhibit 10.5 of Vascular Solutions' Registration Statement on Form S-1 (File No. 333-84089)).                                    

34

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|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 10.5 of Vascular Solutions' Form 10-Q for the quarter ended March 31, 2004).                
|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** | Supply Agreement dated October 18, 2004 by and between Vascular Solutions and Sigma-Aldrich Fine Chemicals, an operating division of Sigma-Aldrich, Inc.                                                                                  
|10.13** | Private Label Purchase Agreement dated September 22, 2003 by and between Vascular Solutions and MedArt Corporation (incorporated by reference to Exhibit 10.18 of Vascular Solutions Form 10-Q for the quarter ended September 30, 2003).
|10.14   | Loan and Security Agreement dated December 31, 2003 by and between Vascular Solutions and Silicon Valley Bank (incorporated by reference to Exhibit 10.14 of Vascular Solutions Form 10-K for the year ended December 31, 2003).         
|10.15   | Amendment to Loan Agreement dated December 9, 2004 by and between Vascular Solutions and Silicon Valley Bank.                                                                                                                             
|10.16*  | Form of Incentive Stock Option Agreement (Plan) (incorporated by reference to Exhibit 10.1 of Vascular Solutions 8-K dated September 22, 2004).                                                                                          
|10.17*  | Form of Nonqualified Stock Option Agreement (Plan) (incorporated by reference to Exhibit 10.2 of Vascular Solutions 8-K dated September 22, 2004).                                                                                       
|10.18*  | Form of Board of Director Stock Option Agreement (Plan) (incorporated by reference to Exhibit 10.3 of Vascular Solutions 8-K dated September 22, 2004).                                                                                  
|14      | Code of Ethics (incorporated by reference to Exhibit 14 of Vascular Solutions Form 10-K for the year ended December 31, 2003).                                                                                                           
|21      | List of Subsidiaries                                                                                                                                                                                                                      
|23.1    | Consent of Virchow, Krause & Company, LLP.                                                                                                                                                                                                
|23.2    | 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 Sarbanes-Oxley Act of 2002.                                                                                                                                       
|32.1    | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                       
|        |                                                                                                                                                                                                                                           

35

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|32.2 | to Exhibit 10.8 of Vascular Solutions' Registration Statement on Form S-1 (File No. 333-84089)).
|---- | ------------------------------------------------------------------------------------------------

_________________

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

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

36

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# 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 4th day of February 2005.

| | VASCULAR SOLUTIONS, INC.
| | ------------------------
|
| | By:                     
| |                         
| |                         

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 4th day of February, 2005, by the following persons in the capacities indicated.

|Signature             | Title                                       
|--------------------- | --------------------------------------------
|                     
|/s/ Howard Root       | Chief Executive Officer and Director        
|                      | (principal executive officer)               
|Howard Root          
|                      |                                             
|                     
|/s/ James Hennen      | Chief Financial Officer                     
|                      | (principal financial and accounting officer)
|James Hennen         
|                      |                                             
|                     
|/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     

37

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# SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

|Description                     | Balance at
Beginning
of Year |  | Additions
Charged
to Costs
and
Expenses |         | Less
Deductions |   | Balance at
End of Year
|------------------------------- | ---------------------------- |  | --------------------------------------- | ------- | --------------- | - | ----------------------
|                                |                              |  |                                         |         |                 |   |                       
|YEAR ENDED DECEMBER 31, 2004:   |                              |  |                                         |         |                 |   |                       
|Sales return allowance          |                              |  | $                                       | 20,000  |                 | $ | 20,324                
|Allowance for doubtful accounts |                              |  |                                         | 140,000 |                 |   | 33,774                
|                                |                              |  |                                         |         |                 |   |                       
|Total                           |                              |  | $                                       | 160,000 |                 | $ | 54,098                
|                                |                              |  |                                         |         |                 |   |                       
|                               
|YEAR ENDED DECEMBER 31, 2003:  
|Sales return allowance          |                              |  | $                                       | 40,000  |                 | $ | (12,708               
|Allowance for doubtful accounts |                              |  |                                         | 90,000  |                 |   | 69,099                
|                                |                              |  |                                         |         |                 |   |                       
|Total                           |                              |  | $                                       | 130,000 |                 | $ | 56,391                
|                                |                              |  |                                         |         |                 |   |                       
|                               
|YEAR ENDED DECEMBER 31, 2002:   |                              | 
|Sales return allowance          |                              |  | $                                       | 64,526  |                 | $ | 174,642               
|Allowance for doubtful accounts |                              |  |                                         | 110,000 |                 |   | 23,592                
|                                |                              |  |                                         |         |                 |   |                       
|Total                           |                              |  | $                                       | 174,526 |                 | $ | 198,234               
|                                |                              |  |                                         |         |                 |   |                       

38

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Report of Independent
Registered Public Accounting Firm

The Board of Directors
and ShareholdersVascular Solutions, Inc.

We have audited the accompanying consolidated
balance sheet of Vascular Solutions, Inc. as of December 31, 2004, and the related
consolidated statements of operations, changes in shareholders equity and cash flows
for the year ended December 31, 2004. These consolidated financial statements are the
responsibility of the companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

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

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
financial position of Vascular Solutions, Inc. as of December 31, 2004 and the results of
their operations and their cash flows for the year ended December 31, 2004, in conformity
with U.S. generally accepted accounting principles.

| | /s/ Virchow, Krause & Company, LLP
| | ----------------------------------

Minneapolis, Minnesota
January 21, 2005

39

---

Report of Independent
Registered Public Accounting Firm

The Board of Directors and Shareholders
Vascular Solutions, Inc.

We have audited the consolidated balance
sheet of Vascular Solutions, Inc. as of December 31, 2003, and the related statements of
operations, changes in shareholders equity, and cash flows for each of the two 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 the standards of the Public Company Accounting Oversight Board (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 the consolidated
results of its operations and its cash flows for each of the two years in the period ended
December 31, 2003, in conformity with U.S. generally accepted accounting principles.

| | /s/ Ernst & Young LLP
| | ---------------------

Minneapolis, Minnesota
January 16, 2004

40

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Report of Independent
Registered Public Accounting Firm

The Board of Directors and Shareholders
Vascular Solutions, Inc.

Under date of January 21, 2005,
we reported on the consolidated balance sheet of Vascular Solutions, Inc. as of December
31, 2004, and the related consolidated statements of operations, changes in
shareholders equity, and cash flows for the year ended December 31, 2004, as
contained in the annual report on Form 10-K for the year ended December 31, 2004. In
connection with our audit of the aforementioned consolidated financial statements, we have
also audited the related financial statement schedule as listed in the accompanying index.
This financial statement schedule is the responsibility of the Companys management.
Our responsibility is to express an opinion on this financial statement schedule based on
our audit.

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

| | /s/ Virchow, Krause & Company LLP
| | ---------------------------------

Minneapolis, Minnesota
January 21, 2005

41

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Report of Independent
Registered Public Accounting Firm

The Board of Directors and Shareholders
Vascular Solutions, Inc.

We have audited managements
assessment, included in the accompanying Managements Report on Internal Control Over
Financial Reporting appearing under Item 9A, that Vascular Solutions, Inc. (the
Company) maintained effective internal control over financial reporting as of
December 31, 2004, based on the criteria established in Internal Control  Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Vascular Solutions, Inc.s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to
express an opinion on managements assessment and an opinion on the effectiveness of
the Companys internal control over financial reporting based on our audit.

We conducted our audit in accordance
with standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.

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

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

In our opinion, managements
assessment that Vascular Solutions, Inc. maintained effective internal control over
financial reporting as of December 31, 2004, is fairly stated, in all material respects,
based on criteria established in Internal Control  Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also in our
opinion, Vascular Solutions, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2004, based on criteria established in
Internal Control  Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).

We have also audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United States), the
accompanying consolidated balance sheet of Vascular Solutions, Inc. as of December 31,
2004 and the related consolidated statements of operations, changes in shareholders
equity and cash flows for the year ended December 31, 2004, and our report dated January
21, 2005, expresses an unqualified opinion on those consolidated financial statements.

| | /s/ Virchow, Krause & Company, LLP
| | ----------------------------------

Minneapolis, Minnesota
January 21, 2005

42

---

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 $180,000 and $160,000 at
|December 31, 2004 and 2003, 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 - 14,350,937 - 2004;              
|12,989,170 - 2003                                                |            
|Additional paid-in capital                                       |            
|Other                                                            |            
|Accumulated deficit                                              |            
|                                                                 |            
|Total shareholders' equity                                       |            
|                                                                 |            
|Total liabilities and shareholders' equity                       |            
|                                                                 |            

See accompanying notes

43

---

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                            |                       
|Thrombin qualification                      |                       
|Amortization of purchased technology        |                       
|                                            |                       
|Total operating expenses                    |                       
|                                            |                       
|Operating loss                              |                       
|Interest income                             |                       
|                                            |                       
|Net loss                                    |                       
|                                            |                       
|Basic and diluted net loss per common share |                       
|                                            |                       
|Shares used in computing basic and diluted 
|net loss per common share                   |                       
|                                            |                       

See accompanying notes

44

---

Vascular Solutions, Inc.

Consolidated Statements of Changes in Shareholders Equity

|                                      |  | 
|------------------------------------- |  | 
|
|
|Balance at December 31, 2001          |  | 
|Exercise of stock options             |  | 
|Issuance of common stock under the   
|Employee Stock Purchase Plan          |  | 
|Stock repurchase program              |  | 
|Deferred compensation related to      |  | 
|option grants                         |  | 
|Amortization of deferred compensation |  | 
|Comprehensive loss:                  
|Net loss                              |  | 
|Translation adjustment                |  | 
|                                      |  | 
|Total comprehensive loss              |  | 
|                                      |  | 
|Balance at December 31, 2002          |  | 
|Exercise of stock options             |  | 
|Issuance of common stock under the   
|Employee Stock Purchase Plan          |  | 
|Stock repurchase program              |  | 
|Amortization of deferred compensation |  | 
|Comprehensive loss:                   |  | 
|Net loss                              |  | 
|Translation adjustment                |  | 
|                                      |  | 
|Total comprehensive loss              |  | 
|                                      |  | 
|Balance at December 31, 2003          |  | 
|Exercise of stock options             |  | 
|Issuance of common stock under the    |  | 
|Employee Stock Purchase Plan          |  | 
|Sale of common stock in private       |  | 
|placement at $6.75 per share in      
|March 2004, net of offering costs     |  | 
|Deferred compensation related to     
|option grants                         |  | 
|Amortization of deferred compensation |  | 
|Comprehensive loss:                   |  | 
|Net loss                              |  | 
|Translation adjustment                |  | 
|                                      |  | 
|Total comprehensive loss              |  | 
|                                      |  | 
|Balance at December 31, 2004          |  | 
|                                      |  | 

See accompanying notes.

45

---

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                                        |                       
|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, net             |                       
|Purchase of securities                              |                       
|Proceeds from sales of securities                   |                       
|                                                    |                       
|Net cash provided by investing activities           |                       
|Financing activities                               
|Proceeds from exercise of stock options             |                       
|Net proceeds from sale of common stock              |                       
|Repurchase of common stock                          |                       
|                                                    |                       
|Net cash provided by (used in) 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.

46

---

# 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 current principle
product lines consist of the following medical devices:

| |  |  | D-Stat
Dry hemostatic bandage, a topical pad with a bandage used to control surface
bleeding,
| | - |  | ----------------------------------------------------------------------------------------------

| |  |  | Pronto extraction
catheter, a mechanical system for the removal of soft thrombus from arteries,
| | - |  | ------------------------------------------------------------------------------------------------

| |  |  | Vari-Lase® endovenous
laser system, a laser console and procedure kit used for the treatment of varicose veins,
| | - |  | ---------------------------------------------------------------------------------------------------------------

| |  |  | 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,
| | - |  | -----------------------------------------------------------------------------------

| |  |  | Langston dual
lumen pigtail catheter, used for the measurement of differential arterial pressures,
| | - |  | ---------------------------------------------------------------------------------------------------

| |  |  | MAX-Support abdominal
retraction belt, used to allow femoral access in obese patients, and
| | - |  | -------------------------------------------------------------------------------------------

| |  |  | Acolysis® ultrasound
(sold in international markets only), a treatment for peripheral occlusive arterial
disease.
| | - |  | -----------------------------------------------------------------------------------------------------------------

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

# 2.   Summary of Significant Accounting Policies

Basis of Consolidation

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

Segment Reporting

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

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. The accumulated
other comprehensive income for the foreign currency translation adjustment at December 31,
2004 and 2003 was $143,660 and $42,052, respectively.

47

---

# 2.   Summary of
Significant Accounting Policies (continued)

Fair Value of Financial
Instruments

The carrying amount for cash and cash
equivalents, accounts receivable, accounts payable, and accrued expenses approximates fair
value due to the immediate or short-term maturity of these financial instruments.

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.

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. The Company deposits its cash in high quality financial
institutions. The balances, at times may exceed federally insured limits.

Credit risk and allowance
for doubtful accounts

The Company maintains allowances for
doubtful accounts for estimated losses resulting from the inability of our customers to
make required payments. This allowance is regularly evaluated by the Company for adequacy
by taking into consideration factors such as past experience, credit quality of the
customer base, age of the receivable balances, both individually and in the aggregate, and
current economic conditions that may affect a customers ability to pay. Accounts
receivable over 60 days past due are considered past due. The Company does not accrue
interest on past due accounts receivable. Receivables are written off only after all
collection attempts have failed and are based on individual credit evaluation and the
specific circumstances of the customer. At December 31, 2004 and 2003, the allowance for
doubtful accounts was $160,000 and $140,000, respectively.

All product returns must be
pre-approved and, if approved, customers are subject to a 20% restocking charge. The
Company analyzes the rate of historical returns when evaluating the adequacy of the
allowance for sales returns, which is included with the allowance for doubtful accounts on
our balance sheet. At December 31, 2004 and 2003, the sales and return allowance was
$20,000 and $20,000, respectively.

Accounts receivable are shown net of
the combined total of the allowance for doubtful accounts and allowance for sales returns
of $180,000 and $160,000 at December 31, 2004 and 2003, respectively.

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. There were no material realized gains or losses on the sales of
available-for-sale securities during the years ended December 31, 2004, 2003 and
2002.  For purposes of determining gross realized gains or losses, the cost of
available-for-sale securities is based on specific identification.

48

---

# 2.   Summary of
Significant Accounting Policies (continued)

At December 31, 2004 and 2003, the
Company had the following available for sale securities with carrying values equal to fair
values:

|                            | 2004 |  | 2003
|--------------------------- | ---- |  | ----
|                            |     
|Corporate Debt              |      |  |     
|U.S. Government Obligations |      |  |     
|                            |     
|                            |      |  | $   
|                            |     

Inventories

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

|                | 2004 |  | 2003
|--------------- | ---- |  | ----
|                |     
|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.
To date, the Company has determined that no impairment of long-lived assets exists.

Revenue Recognition

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

49

---

# 2.   Summary of Significant Accounting Policies (continued)

agreed upon price. All product returns must be pre-approved and, if approved,
customers are subject to a 20% restocking charge.

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.

Shipping and handling
costs

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

Research and Development
Costs

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

Warranty Costs

Effective during the year ended
December 31, 2004, certain of the Companys products are covered by warranties
against defects in material and workmanship for periods of up to 24 months. The Company
records a liability for warranty claims at the time of sale. The amount of the liability
is based on the amount the Company is charged from their original equipment manufacturer
to cover the warranty period. The original equipment manufacturer includes a year warranty
with each product sold to the Company. The Company records a liability for the uncovered
warranty period offered to a customer, provided the warranty period offered exceeds the
initial one year warranty period covered by the original equipment manufacturer.

Warranty provisions and claims for
the year ended December 31, 2004, were as follows:

|Twelve Months End | Beginning Balance | Warrant | Warranty Claims | Ending 
|----------------- | ----------------- | ------- | --------------- | -------
|                 
|December 31, 200  | $                | $32,895 | $              | $32,895

Stock-Based Compensation

At December 31, 2004, the Company had a stock-based employee compensation
plan, which is described more fully in Note 10. The Company accounts for the plan 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 the plan 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.

50

---

# 2.   Summary of
Significant Accounting Policies (continued)

|                                                | 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 common share:                      |                       
|Basic and diluted - as reported                 |                       
|                                                |                       
|Basic and diluted - pro forma                   |                       
|                                                |                       

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:

|                        | 2004 |  | 2003 |       | 2002
|----------------------- | ---- |  | ---- | ----- | ----
|                        |      | 
|Expected life (years)   |      |  |      | 6.50  |     
|Expected volatility     |      |  |      | 94%   |     
|Risk-free interest rate |      |  |      | 3.85% |     

The weighted average fair value of
options granted with an exercise price equal to the deemed stock price on the date of
grant during 2004, 2003 and 2002 was $5.77, $0.71 and $1.58, 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. Deferred tax assets
are reduced by a valuation allowance to the extent that realization of the related
deferred tax asset is not assured.

Net Loss Per Common Share

In accordance with SFAS No. 128,
Earnings Per Share, basic net loss per common share is computed by dividing net
loss by the weighted average common shares outstanding during the periods presented.
Diluted net loss per common 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 common share because the effect of outstanding options and warrants is
antidilutive.

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, 2004.

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

51

---

2.   Summary of Significant
Accounting Policies (continued)

annually or as changes in
circumstances or the occurrence of events suggest the remaining value is not recoverable.

New Accounting
Pronouncements

In December 2004, the Financial
Accounting Standards Board (FASB) issued Statement No. 123R, Share-Based Payment(SFAS 123R), which requires companies to measure and recognize compensation expense
for all stock-based payments at fair value.  SFAS 123R is effective for all interim
periods beginning after June 15, 2005.  Early adoption is encouraged and retroactive
application of the provisions of SFAS 123R to the beginning of the fiscal year that
includes the effective date is permitted, but not required.  The Company is currently
evaluating the impact of SFAS 123R on its financial position and results of
operations.  See elsewhere in this Note 2 for information related to the pro forma
effects on the Companys reported net loss and net loss per common share of applying
the fair value recognition provisions of the previous Statement of Financial Accounting
Standards (SFAS) 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation.

# 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 elsewhere 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 in 2005 and approximately $72,500 in 2006.

Balances of acquired intangible
assets as of December 31, 2004 were as follows:

|                            | CarryingAmount |  | Accumulated
Amortization |           | Net
|--------------------------- | -------------- |  | ------------------------ | --------- | ---
|                            |                | 
|Amortizing intangibles:     |                |  |                          |           |    
|Purchased technology        |                |  | $                        | 870,000   |    
|Non-amortizing intangibles: |                | 
|Goodwill                    |                |  |                          | 192,595   |    
|                            |                | 
|                            |                |  | $                        | 1,062,595 |    
|                            |                | 

52

---

# 4.   Goodwill and Other Intangible Assets (continued)

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

|                            | CarryingAmount |  | Accumulated
Amortization |           | Net
|--------------------------- | -------------- |  | ------------------------ | --------- | ---
|                            |                | 
|Amortizing intangibles:     |                |  |                          |           |    
|Purchased technology        |                |  | $                        | 870,000   |    
|Non-amortizing intangibles: |                | 
|Goodwill                    |                |  |                          | 192,595   |    
|                            |                | 
|                            |                |  | $                        | 1,062,595 |    
|                            |                | 

# 5.   Property and Equipment

Property and equipment consists of
the following at December 31:

|                                   | 2004 |  | 2003
|---------------------------------- | ---- |  | ----
|                                   |      | 
|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.   Private Placement

On March 9, 2004, we sold 888,900
shares of our common stock at an offering price of $6.75 per share for net proceeds of
$5,592,561 in a private placement

# 7.   Line of Credit

On December 13, 2004, the Company
modified the secured asset-based loan and security agreement dated December 31, 2003. This
line of credit is a one-year, $5,000,000 facility with availability based primarily on
eligible customer receivables and inventory. The interest rate is prime plus 0.5%. As of
December 31, 2004, the Company had no outstanding loan balance against the facility. Based
on the Companys eligible customer receivables, inventory and cash balances,
$3,069,000 was available for borrowing as of December 31, 2004. The fee for the unused
portion of the line of credit is $2,125 per quarter. The facility fee of $25,000 is
payable upon the first advance. This line of credit includes two covenants: minimum
tangible net worth of $11,000,000 and a liquidity coverage of not less than 1.25 to 1.00.
The Company was in compliance with these covenants at December 31, 2004.

# 8.   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 lease was approximately
$343,000, $336,000, and $303,100 for the years ended December 31, 2004, 2003, and 2002,
respectively.

53

---

# 8.   Leases (continued)

Future minimum lease commitments
under this operating lease as of December 31, 2004 are as follows:

|     | 
|---- | 
|2005 | 
|2006 | 
|2007 | 
|2008 | 
|     | 
|     | 
|     | 

# 9.   Income Taxes

At December 31, 2004, the Company had
net operating loss carryforwards of approximately $57,865,000 for federal income tax
purposes that are available to offset future taxable income and begin to expire in the
year 2013. At December 31, 2004, the Company also had federal and Minnesota research and
development tax credit carryforwards of approximately $1,598,000, which begin to expire in
the year 2013. At December 31, 2004, the Company has foreign tax loss carryforwards of
approximately $2,358,000 that do not expire. No benefit has been recorded for any loss or
credit 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, 2004 and 2003 are as follows:

|                                 | 2004 |  | 2003
|-------------------------------- | ---- |  | ----
|                                 |      | 
|Deferred tax assets:             |      |  |     
|Net operating loss carryforwards |      |  | $   
|Tax credit carryforwards         |      |  |     
|Depreciation and amortization    |      |  |     
|Accrued compensation             |      |  |     
|Inventory reserve                |      |  |     
|Other allowances                 |      |  |     
|                                 |      | 
|                                 |      |  |     
|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. The increase in the valuation allowance was $2,196,000,
$4,150,000 and $5,425,000 for the years ending December 31, 2004, 2003 and 2002,
respectively.

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

|                                           | 2004 |  | 2003 |       | 2002
|------------------------------------------ | ---- |  | ---- | ----- | ----
|                                           |      | 
|Tax at statutory rate                      |      |  |      | (34.0 | )%  
|State income taxes, net of federal benefit |      |  |      | (6.0  | )   
|Meals and entertainment                    |      |  |      | 3.0   |     
|Federal research credits                   |      |  |      | (3.0  | )   
|Impact of net operating loss carryforward  |      |  |      | 40.0  |     
|                                           |      | 
|Effective income tax rate                  |      |  |      |      | %   
|                                           |      | 

54

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# 10.   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, 2004, the Company had reserved 3,400,000 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.

Option activity is summarized as
follows:

|                             | Shares
Available
for Grant |  | Plan Options
Outstanding |           | Exercise
Price |  | Weighted Average
Exercise
Price
|---------------------------- | -------------------------- |  | ------------------------ | --------- | -------------- |  | -------------------------------
|                             |                            | 
|Balance at December 31, 2001 |                            |  |                          | 49,789    |                |  | 1,574,811                      
|Shares reserved              |                            |  |                          | 500,000   |                |  |                               
|Granted                      |                            |  |                          | (186,000  | )              |  | 186,000                        
|Exercised                    |                            |  |                          |          |                |  | (10,000                        
|Canceled                     |                            |  |                          | 849,890   |                |  | (849,890                       
|                             |                            | 
|Balance at December 31, 2002 |                            |  |                          | 1,213,679 |                |  | 900,921                        
|Shares reserved              |                            |  |                          | 500,000   |                |  |                               
|Granted                      |                            |  |                          | (889,070  | )              |  | 889,070                        
|Exercised                    |                            |  |                          |          |                |  | (65,855                        
|Canceled                     |                            |  |                          | 218,965   |                |  | (218,965                       
|                             |                            | 
|Balance at December 31, 2003 |                            |  |                          | 1,043,574 |                |  | 1,505,171                      
|Shares reserved              |                            |  |                          | 500,000   |                |  |                               
|Granted                      |                            |  |                          | (357,000  | )              |  | 357,000                        
|Exercised                    |                            |  |                          |          |                |  | (166,745                       
|Canceled                     |                            |  |                          | 50,265    |                |  | (50,265                        
|                             |                            | 
|Balance at December 31, 2004 |                            |  |                          | 1,236,839 |                |  | 1,645,161                      
|                             |                            | 

55

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# 10.   Stock Options and
Warrants (continued)

The following table summarizes
information about stock options outstanding at December 31, 2004:

|              | Options Outstanding | Options Exercisable
|------------- | ------------------- | -------------------
|              |                     |                    
|
|              |                     |                    
|$0.78-$  0.83 |                     |                    
|0.84-    0.84 |                     |                    
|0.85-    2.51 |                     |                    
|2.52-    6.00 |                     |                    
|6.01-    7.00 |                     |                    
|7.01-  12.00  |                     |                    
|              |                     |                    
|              |                     |                    
|              |                     |                    

Deferred Compensation

In 2004, 2003, and 2002, the Company
recorded $53,759, $0 and $1,858, respectively, of deferred compensation in connection with
certain nonqualified stock options granted to medical advisory board members. The weighted
average fair value of these options was $4.12. 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 $11,788, $40,545 and $74,668 for the
years ended December 31, 2004, 2003, and 2002, respectively.

Warrants

As of December 31, 2004, the Company
had the following warrants outstanding and exercisable:

|Exercise Price | Outstanding as of
December 31, 2004 |  | Expiration Date
|-------------- | ----------------------------------- |  | ---------------
|              
|1.50           |                                     |  |                
|1.50           |                                     |  |                
|3.00           |                                     |  |                
|              
|$2.13          |                                     |  |                

# 11.   Employee Stock Purchase Plan

The Company has an Employee Stock
Purchase Plan (the Purchase Plan) under which 1,100,000 shares of common stock have been
reserved for issuance. Eligible employees may contribute 1% to 10% of their compensation
to purchase shares of the Companys common stock at a discount of 15% of the market
value at certain plan-defined dates up to a maximum of 2,000 shares per purchasing period.
The Purchase Plan terminates in May 2010. In fiscal 2004, 2003 and 2002, 245,567 shares,
195,876 shares, and 152,737 shares, respectively, were issued under the Purchase Plan. At
December 31, 2004, 415,626 shares were available for issuance under the Purchase Plan.

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# 12.   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, respectively. In October 2003, the Board of Directors terminated
the stock repurchase program.

# 13. 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 $73,056, $74,258, and
$91,170 for contributions to the Plan for the years ended December 31, 2004, 2003,
and 2002, respectively.

# 14.   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.

No customers were more than 5% of net
sales for the years ended December 31, 2004, 2003 and 2002.

With respect to accounts receivable,
the Company performs credit evaluations of its customers and does not require collateral.
No customers were more than 5% of gross accounts receivable as of December 31, 2004 and
2003. 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:

|         | 2004 |  | 2003 |    | 2002
|-------- | ---- |  | ---- | -- | ----
|         |     
|Domestic |      |  |      | 89 | %   
|Foreign  |      |  |      | 11 |     

# 15.   Related Party Sales

In fiscal 2004, 2003 and 2002, the
Company sold $278,620, $0 and $0 of product to a company in which a board member of the
Company is a Vice President. As of December 31, 2004 and 2003, the Company had an accounts
receivable balance due of $57,000 and $0 from this related party company.

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# 16.   Dependence on Key Suppliers

King Pharmaceuticals

The Company purchases certain key
components from single-source suppliers. Any significant component delay or interruption
could require the Company to qualify new sources of supply, if available, and could have a
material adverse effect on the Companys financial condition and results of
operations. The Company purchases 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 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 2005 and 2006.

Sigma

On October 18, 2004, the Company
entered into a supply agreement with Sigma-Aldrich Fine Chemicals, an operating division
of Sigma-Aldrich, Inc. (Sigma) for the supply of thrombin to the Company. Pursuant to the
terms of the agreement, the Company will be paying for certain development costs of Sigma
to allow Sigma to produce thrombin. The Company will pay Sigma $570,360 for its
development and qualification costs, $181,560 for capital equipment and $1,725,000 for the
first three lots of thrombin. The payments are based on certain milestones over a two year
period. The contract terminates after ten years and is automatically extended for up to
five additional successive one year terms unless one party delivers notice of termination
at least one year prior to the scheduled termination of the agreement. During the term of
the contract, Sigma has agreed not to sell thrombin of the type developed for the Company
under the contract in or as a component of a hemostatic product for medical use. The
Company does not have any minimum purchase requirements under the contract; however, if
the Company purchases less than three lots of thrombin in any year then (i) Sigma will be
released from its agreement not to sell thrombin in or as a component of a hemostatic
product for medical use, and (ii) Sigma will have the right to terminate the contract on
30 days notice.

The Sigma contract is the start of
the Companys plan to fully qualify a new source of thrombin and to bring the new
thrombin through the regulatory process over the next two years. The cost associated with
the Sigma agreement are part of the Companys total estimated expenditures of $6.1
million (including the payments to Sigma) to complete this project. Approximately $3.3
million of the $6.1 million is for thrombin qualification expenses, $0.3 million is for
capital equipment and $2.5 million is for the purchase of thrombin. The purchase of the
$2.5 million in thrombin is expected to be used in the Companys hemostat products
starting in 2007.

# 17.   Commitments and Contingencies

All legal costs related to litigation are charged to operations as incurred.

Datascope Litigation

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.

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# 17.   Commitments and
Contingencies (continued)

St. Jude Medical
Litigation

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 Companys Vari-Lase endovenous laser
procedure kit the Company 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 Companys Vari-Lase procedure kit. The
complaint requests monetary damages and an injunction on the sale of the Companys
Vari-Lase procedure kit. The Company believes that the allegations included in the
complaint are wholly without merit, have filed their answer to the complaint, and intend
to defend this litigation vigorously. The Companys insurance carrier has accepted
their tender of this claim and is defending this lawsuit. It is not possible to predict
the timing or outcome of this litigation, including whether it will affect the
Companys ability to sell its Vari-Lase procedure kit, or to estimate the amount or
range of potential loss, if any.

On March 4, 2004, the Company was
named as the defendant in an intellectual property lawsuit brought by Diomed, Inc. in the
United States District Court for the District of Massachusetts. The complaint requested a
judgment that the Companys Vari-Lase procedure kit and Vari-Lase laser console
infringe on a single patent held by Diomed, Inc. and asked for relief in the form of an
injunction that would prevent the Company from selling their Vari-Lase products,
compensatory and treble damages caused by the manufacture and sale of the Companys
product, and other costs, disbursements and attorneys fees. The Company believes
that the allegations included in the complaint are wholly without merit, have filed their
answer to the complaint, and intend to defend this litigation vigorously. It is not
possible to predict the timing or outcome of this litigation, including whether it will
affect the Companys ability to sell their Vari-Lase products, 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
was obligated to purchase laser consoles with an aggregate purchase price of $1,197,000
for its Vari-Lase business during the first year of the agreement, which commenced in
December 2003. The Company fulfilled its laser console purchase requirement of $1,197,000
during 2004.

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

|2004                       | FourthQuarter |  | Third
Quarter |        | SecondQuarter |   | First
Quarter
|-------------------------- | ------------- |  | ------------- | ------ | ------------- | - | -------------
|                          
|Net sales                  |               |  | $             | 6,650  |               | $ | 5,931        
|Gross profit               |               |  |               | 4,652  |               |   | 4,290        
|Operating loss             |               |  |               | (599   | )             |   | (445         
|Net loss                   |               |  |               | (573   | )             |   | (437         
|Basic and diluted net loss |               | 
|per share                  |               |  | $             | (0.04  | )             | $ | (0.03        
|                          
|2003                       |               | 
|                          
|Net sales                  |               |  | $             | 3,403  |               | $ | 2,708        
|Gross profit               |               |  |               | 2,242  |               |   | 1,607        
|Operating loss             |               |  |               | (1,981 | )             |   | (2,415       
|Net loss                   |               |  |               | (1,963 | )             |   | (2,385       
|Basic and diluted net loss |               | 
|per share                  |               |  | $             | (0.15  | )             | $ | (0.19        

60

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