-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EBocvC/kV0mXrFUK6110cTDv8s5FMQmqjvca4vbxw7cB7Picg6+0fGLog4nAjDzz EzT3X08dJSDKrfNMEanp8Q== 0000897101-04-000410.txt : 20040302 0000897101-04-000410.hdr.sgml : 20040302 20040302115249 ACCESSION NUMBER: 0000897101-04-000410 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040302 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VASCULAR SOLUTIONS INC CENTRAL INDEX KEY: 0001030206 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 411859679 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-27605 FILM NUMBER: 04641590 BUSINESS ADDRESS: STREET 1: 6464 SYCAMORE COURT NORTH CITY: MINNEAPOLIS STATE: MN ZIP: 55369 BUSINESS PHONE: 7636564300 MAIL ADDRESS: STREET 1: 6464 SYCAMORE COURT NORTH CITY: MINNEAPOLIS STATE: MN ZIP: 55369 10-K 1 vasc041035_10k.htm VASCULAR SOLUTIONS, INC. FORM 10-K FOR YEAR ENDED DECEMBER 31, 2003 Dated: February 27, 2004

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

FORM 10-K

(MARK ONE)

[X]

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

OR

[ ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________ to ________________

Commission File Number: 0-27605

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


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

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

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

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

The aggregate market value of voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold on June 30, 2003 was $21,638,700.

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

PART I

ITEM 1. BUSINESS

Overview

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

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

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

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

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

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

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

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

Interventional Cardiology and Interventional Radiology Industry Background

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

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

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

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

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

Duett Sealing Device

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

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

D-Stat Flowable Hemostat

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

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

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

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

Acolysis Ultrasound Thrombolysis System

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

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

D-Stat Dry and D-Stat Radial Hemostat Products

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

The D-Stat Radial hemostat band is a specially-sized version of the D-Stat Dry that includes a compression band that allows it to be applied over the radial artery in the wrist. In approximately 5% of all catheterizations, the radial artery in the wrist instead of the femoral artery in the groin is used to gain arterial access. In these cases using the radial artery, the health care professional must control bleeding from the artery after the procedure. A variety of compression splints and tapes have been used for this purpose. The D-Stat Radial is the first device that contains an active blood clotting agent together with the compression collar for this purpose. We received regulatory clearance for the D-Stat Radial hemostat band in September 2003, and made manufacturing improvements to the product before launching it in the United States in early 2004.

Vari-Lase Endovenous Laser Products

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

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

Pronto Extraction Catheter

Our Pronto product consists of an extraction catheter with a proprietary distal tip and a large extraction lumen that can be delivered into arteries to mechanically remove blood clots. The Pronto extraction catheter was initially developed by Dr. Pedro Silva of Milan, Italy, who exclusively licensed the design to us in 2002. We received CE mark approval and commenced international sales of the Pronto in August 2003, and received FDA clearance in December 2003 and commenced sales in the United States in early 2004.

Business Strategy

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

•

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

•

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

•

Develop Future Devices through our Direct Sales Force to our Existing Customers. We intend to continue to leverage our direct sales force by bringing additional products to the interventional physician. Our research and development team is working on additional configurations of the D-Stat Dry hemostatic bandage and a new device for the precise measurement of aortic stenosis which we believe we can bring to the United States market before the end of 2004.

•

Explore Corporate Relationships to Augment our Direct Sales Force. For markets for our products beyond the interventional physician and in other situations where synergistic sales can result, we intend to enter into corporate relationships to broaden our products’ reach and increase our revenues.

Sales, Marketing and Distribution

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

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

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

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

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

New Product Development

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

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

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

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

Manufacturing

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

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

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

Competition

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

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

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

•

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

•

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

•

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

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

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

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

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

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

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

Regulatory Requirements

United States

Our products are regulated in the United States as medical devices by the FDA under the Federal Food, Drug and CosmeticAct. The FDA classifies medical devices into one of three classes based upon controls the FDA considers necessary to reasonably ensure their safety and effectiveness. Class I devices are subject to

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

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

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

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

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

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

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

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

International

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

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

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

Third Party Reimbursement

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

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

Patents and Intellectual Property

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

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

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

The interventional medical device market in general, and the vascular sealing device and endovenous laser therapy fields in particular, are characterized by frequent and substantial intellectual property litigation. Each of the vascular sealing products currently on the U.S. market, including our Duett sealing device, has been subject to infringement litigation. (See “Legal Proceedings” in Item 3 of Part I of this Form 10-K) In addition, two of our competitors in the endovenous laser therapy market (AngioDynamics and Diomed) are currently involved in intellectual property litigation. The interpretation of patents involves complex and evolving legal and factual questions. Intellectual property litigation in recent years has proven to be complex and expensive, and the outcome of such litigation is difficult to predict.

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

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

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

Employees

As of December 31, 2003, we had 128 full time employees. Of these employees, 35 were in manufacturing activities, 62 were in sales and marketing activities, 8 were in research and development activities, 14 were in regulatory, quality assurance and clinical research activities and 9 were in general and administrative functions. We have never had a work stoppage and none of our employees are covered by collective bargaining agreements. We believe our employee relations are good.

Executive Officers of the Registrant

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

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

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

Deborah 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.

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.com our annual report on Form 10-K, quarterly reports on Form 10Q, current reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13 (a) or 15 (d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

ITEM 2. PROPERTIES

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

ITEM 3. LEGAL PROCEEDINGS

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

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

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

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

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

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

PART II

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

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

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


2002
First Quarter	$ 3.700	$ 2.480
Second Quarter	2.700	1.680
Third Quarter	1.780	.880
Fourth Quarter	1.200	.650
2003
First Quarter	1.16	0.750
Second Quarter	2.28	0.750
Third Quarter	5.880	2.350
Fourth Quarter	6.420	5.100

Holders

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

Dividends

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

ITEM 6. SELECTED FINANCIAL DATA

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

	Year Ended December 31,
	2003			2002			2001			2000			1999
	(In thousands, except per share amounts)
Statements of Operations Data:
Net sales	$	11,804		$	12,101		$	12,082		$	6,193		$	1,429
Cost of sales		4,570			4,986			4,961			2,701			1,065

Gross profit		7,234			7,115			7,121			3,492			364
Operating expenses:
Research and development		3,671			3,227			4,124			3,117			3,068
Clinical and regulatory		1,536			1,348			1,288			1,082			1,324
Sales and marketing		9,646			11,964			12,772			6,700			2,301
General and administrative		1,942			2,167			2,498			2,255			1,904
Legal settlement		—			3,750			350			—			—
Amortization of purchased technology		217			145			—			—			—

Total operating expenses		17,012			22,601			21,032			13,154			8,597

Operating loss
Interest income		150			507			1,661			1,453			371

Net loss	$	(9,628	)	$	(14,979	)	$	(12,250	)	$	(8,209	)	$	(7,862	)

Net loss per common share -
Basic and diluted	$	(0.75	)	$	(1.13	)	$	(0.93	)	$	(0.95	)	$	(1.95	)
Weighted average number of common
shares outstanding		12,859			13,276			13,217			8,645			4,033

	As of December 31,
	2003		2002		2001		2000		1999
	(In thousands)
Balance Sheet Data:
Cash, cash equivalents and available-
for-sale securities	$	5,885	$	16,750	$	33,318	$	44,098	$	10,529
Working capital		9,223		18,656		34,712		46,300		10,487
Total assets		12,992		22,280		37,593		49,661		12,295
Long-term debt		—		—		—		—		—
Total shareholders’ equity		10,872		20,369		35,630		47,194		11,172

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

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

Overview

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

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

•

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

•

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

•

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

•

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

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

Results of Operations

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

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

•

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

•

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

•

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

•

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

•

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

•

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

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

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

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

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

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

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

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

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

Results of Operations

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

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

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

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

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

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

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

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

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

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

Income Taxes

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

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

Liquidity and Capital Resources

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

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

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

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

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

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

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

	Payments due by Period
Contractual Obligations	Total		Less than 1 year		1-3 years		4-5 years		After 5 years
Facility Operating Lease	$	1,708,920	$	348,948	$	1,082,304	$	277,668	$ —
MedArt Purchase Commitment		1,197,000		1,197,000		—		—	—

Total Contractual Cash Obligations	$	2,905,920	$	1,545,948	$	1,082,304	$	277,668	$ —

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

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

Critical Accounting Policies:

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

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

Inventory

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

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

Revenue Recognition

We recognize revenue upon shipment of products to customers, net of estimated returns. We analyze the rate of historical returns when evaluating the adequacy of the allowance for sales returns, which is included with the allowance for doubtful accounts on our balance sheet. At December 31, 2003, this reserve was $20,000 compared to $40,000 at December 31, 2002. If the historical data we use to calculate these estimates does not properly reflect future returns, revenue could be overstated.

Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. This allowance is regularly evaluated by us for adequacy by taking into consideration factors such as past experience, credit quality of the customer base, age of the receivable balances, both individually and in the aggregate, and current economic conditions that may affect a customer’s ability to pay. At December 31, 2003, this reserve was $140,000 compared to $90,000 at December 31, 2002. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Income Taxes

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

New Accounting Pronouncements

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

RISK FACTORS

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

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

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

•

believe that our products offer benefits compared to the methodologies and/or devices that they are currently using;

•

use our products and obtain acceptable clinical outcomes;

•

believe that our products are worth the price that they will be asked to pay; and

•

be willing to commit the time and resources required to change their current methodology.

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

We have limited working capital to pursue our business

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

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

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

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

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

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

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

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

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

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

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

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

•

the level of sales of our products in the United States market;

•

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

•

the demand for and acceptance of our products;

•

the success of our competition and the introduction of alternative products;

•

our ability to command favorable pricing for our products;

•

the growth of the market for our devices;

•

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

•

actions relating to ongoing FDA compliance;

•

the effect of intellectual property disputes;

•

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

•

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

•

unanticipated delays or an inability to control costs;

•

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

•

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

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

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

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

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

•

better name recognition;

•

broader product lines;

•

greater sales, marketing and distribution capabilities;

•

significantly greater financial resources;

•

larger research and development staffs and facilities; and

•

existing relationships with some of our potential customers.

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

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

Our international sales are subject to several risks, including:

•

the ability of our independent distributors to sell our products;

•

the impact of recessions in economies outside the United States;

•

greater difficulty in collecting accounts receivable and longer collection periods;

•

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

•

weaker intellectual property rights protection in some countries;

•

potentially adverse tax consequences; and

•

political and economic instability.

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

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

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

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

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

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

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

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

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

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

•

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

•

satisfy these agencies’ content requirements for all of our labeling, sales and promotional materials; and

•

undergo rigorous inspections by these agencies.

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

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

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

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Financial Statements and Notes thereto required pursuant to this Item begin on page 36 of this Annual Report on Form 10-K.

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(f) under the Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in timely alerting them to the material information relating to us (or our consolidated subsidiaries) required to be included in the reports we file or submit under the Exchange Act.

Changes in internal controls.

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

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Incorporated herein by reference to the Sections under the headings “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” contained in the Proxy Statement for our Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days of the close of the year ended December 31, 2003.

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

ITEM 11. EXECUTIVE COMPENSATION

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

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

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

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

PART IV

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

(a)

Documents filed as part of this Report.

(1)

The following financial statements are filed herewith in Item 8 in Part II.

(i)

Report of Independent Auditors

(ii)

Consolidated Balance Sheets

(iii)

Consolidated Statements of Operations

(iv)

Consolidated Statement of Changes in Shareholders’ Equity

(v)

Consolidated Statements of Cash Flows

(vi)

Notes to Consolidated Financial Statements

(2)

Financial Statement Schedules

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

(3)

Exhibits

Exhibit Number		Description

3	.1	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 333

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 Solution

4	.5	Stock Purchase Warrant dated June 10, 1999 by and between Vascular Solutions, Inc. and Jones Pharma, Incorporated (incorporated by reference to Exhibit 4.7 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

10	.2	Mutual and General Release dated November 9, 1998 by and between Vascular Solutions, Inc., Dr. Gary Gershony and B. Braun Medical, Inc. (incorporated by reference to Exhibit 10.5 of Vascular Solutions’ Registration Statement on Form S-

10	.3	Purchase and Sale Agreement dated September 17, 1998 by and between Vascular Solutions, Inc. and Davol Inc. (incorporated by reference to Exhibit 10.8 of Vascular Solutions’ Registration Statement on Form S-1 (File No. 333-84089)).

10	.4	Purchase Agreement dated June 10, 1999 by and between GenTrac, Inc. and Vascular Solutions, Inc. (incorporated by reference to Exhibit 10.9 of Vascular Solutions’ Registration Statement on Form S-1 (File No. 333-84089)).

10	.5*	Form of Employment Agreement by and between Vascular Solutions, Inc. and each of its executive officers (incorporated by reference to Exhibit 10.11 of Vascular Solutions’ Registration Statement on Form S-1 (File No. 333-84089)).

10	.6	Form of Distribution Agreement (incorporated by reference to Exhibit 10.12 of Vascular Solutions’ Registration Statement on Form S-1 (File No. 333-84089)).

10	.7*	Vascular Solutions, Inc. Employee Stock Purchase Plan, as amended (incorporated by reference to Exhibit 10.14 to Vascular Solutions’ Form 10-K for the year ended December 31, 2000).

10	.8	Settlement Agreement dated July 12, 2001 by and between Vascular Solutions and St. Jude Medical and Daig Corporation (incorporated by reference to Exhibit 99.2 to Vascular Solutions’ Form 8-K dated July 12, 2001).

10	.9	Purchase Agreement dated April 30, 2002 by and between Vascular Solutions and Angiosonics (incorporated by reference to Exhibit 99.2 to Vascular Solutions’ Form 8-K dated April 30, 2002).

10	.10*	Stock Option and Stock Award Plan as Amended July 16, 2002 (incorporated by reference to Exhibit 10.1 of Vascular Solutions’ Form 10-Q for the quarter ended June 30, 2002).
10	.11	Settlement Agreement dated November 26, 2002 by and between Vascular Solutions and Datascope (incorporated by reference to Exhibit 99.2 to Vascular Solutions’ Form 8-K dated November 26, 2002).

10	.12**	License and Supply Agreement dated December 17, 2002 by and between Vascular Solutions and Tepha, Inc. (incorporated by reference to Exhibit 10.17 of Vascular Solutions’ Form 10-K for the year ended December 31, 2002).

10	.13**	Private Label Purchase Agreement dated September 22, 2003 by and between Vascular Solutions and MedArt Corportation (incorporated by reference to Exhibit 10.18 of Vascular Solutions’ Form 10-Q for the quarter ended September 30, 3003).

10	.14	Loan and Security Agreement dated December 31, 2003 by and between Vascular Solutions and Silicon Valley Bank.

14		Code of Ethics

21		List of Subsidiaries

23	.1	Consent of Ernst & Young LLP.

24	.1	Power of Attorney (included on signature page).

31	.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31	.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sabanes-Oxley Act of 2002.

32	.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32	.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

(b) Reports on Form 8-K:

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

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

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 27th day of February, 2004.

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

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

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on the 19th day of February, 2004, by the following persons in the capacities indicated.

Signature	Title
/s/ Howard Root	Chief Executive Officer and Director
Howard Root	(Principal Executive Officer)
/s/ James Hennen	Chief Financial Officer
James Hennen	(Principal Financial and Accounting Officer)
/s/ James Jacoby, Jr.	Director
James Jacoby, Jr.
/s/ Richard Nigon	Director
Richard Nigon
/s/ Michael Kopp	Director
Michael Kopp
/s/ Paul O’Connell	Director
Paul O’Connell
/s/ John Erb	Director
John Erb
/s/ Dr. Gary Dorfman	Director
Dr. Gary Dorfman

SCHEDULE II

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

Description	Balance at Beginning of Year		Additions Charged to Costs and Expenses			Less Deductions		Balance at End of Year
YEAR ENDED DECEMBER 31, 2003:
Sales return allowance	$	40,000	$	(12,708	)	$	7,292	$	20,000
Allowance for doubtful accounts		90,000		69,099			19,099		140,000

Total	$	130,000	$	56,391		$	26,391	$	160,000

YEAR ENDED DECEMBER 31, 2002:
Sales return allowance		64,526	$	174,642		$	199,168	$	40,000
Allowance for doubtful accounts		110,000		23,592			43,592		90,000

Total	$	174,526	$	198,234		$	242,760	$	130,000

Year Ended December 31, 2001:
Sales return allowance		—		401,733			337,207		64,526
Allowance for doubtful accounts		80,000		35,304			5,304		110,000

Total	$	80,000	$	437,037			342,511	$	174,526

Report of Independent Auditors

The Board of Directors and Shareholders
Vascular Solutions, Inc.

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

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

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

Ernst & Young LLP

Minneapolis, Minnesota
January 16, 2004

Vascular Solutions, Inc.

Consolidated Balance Sheets

	December 31
	2003			2002
Assets
Current assets:
Cash and cash equivalents	$	2,864,913		$	1,835,059
Available-for-sale securities		3,019,693			14,914,444
Accounts receivable, net of reserves of $160,000 and
$130,000 in 2003 and 2002, respectively		1,810,443			1,357,946
Inventories		3,186,274			2,132,516
Prepaid expenses		462,154			326,773

Total current assets		11,343,477			20,566,738
Property and equipment, net		948,602			795,885
Intangible assets, net		700,095			917,595

Total assets	$	12,992,174		$	22,280,218

Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	750,762		$	771,078
Accrued compensation		1,111,049			886,130
Accrued expenses		258,228			253,777

Total current liabilities		2,120,039			1,910,985
Commitments
Shareholders’ equity:
Common stock, $0.01 par value:
Authorized shares - 40,000,000
Issued and outstanding shares - 12,989,170 - 2003;
12,880,839 - 2002		129,892			128,808
Additional paid-in capital		70,422,926			70,355,343
Other		(41,356	)		(21,278	)
Accumulated deficit		(59,722,039	)		(50,093,640	)

Total shareholders’ equity		10,872,135			20,369,233

Total liabilities and shareholders’ equity	$	12,992,174		$	22,280,218

See accompanying notes

Vascular Solutions, Inc.

Consolidated Statements of Operations

	Year Ended December 31
	2003			2002			2001
Net sales	$	11,804,328		$	12,100,526		$	12,082,379
Cost of goods sold		4,570,242			4,985,587			4,961,014

Gross profit		7,234,086			7,114,939			7,121,365
Operating expenses:
Research and development		3,670,935			3,227,538			4,123,883
Clinical and regulatory		1,535,989			1,347,694			1,288,301
Sales and marketing		9,645,920			11,963,907			12,771,901
General and administrative		1,942,483			2,166,883			2,498,435
Legal settlement		—			3,750,000			350,000
Amortization of purchased technology		217,500			145,000			—

Total operating expenses		17,012,827			22,601,022			21,032,520

Operating loss		(9,778,741	)		(15,486,083	)		(13,911,155	)
Interest income		150,342			507,169			1,660,757

Net loss	$	(9,628,399	)	$	(14,978,914	)	$	(12,250,398	)

Basic and diluted net loss per share	$	(0.75	)	$	(1.13	)	$	(0.93	)

Shares used in computing basic and diluted
net loss per share		12,858,765			13,276,147			13,216,773

See accompanying notes

Vascular Solutions, Inc.

Consolidated Statement of Changes in Shareholders’ Equity

	Common Stock
	Shares			Amount			Additional Paid-in Capital			Other			Accumulated Deficit			TOTAL
Balance at December 31, 2000		13,116,008			131,160			69,965,240			(38,182	)		(22,864,328	)		47,193,890
Exercise of stock options		120,800			1,208			304,096			—			—			305,304
Issuance of common stock under the
Employee Stock Purchase Plan		90,194			902			308,660			—			—			309,562
Value of stock options granted for
services		—			—			10,398			—			—			10,398
Deferred compensation related to
option grants		—			—			123,780			(123,780	)		—			—
Amortization of deferred compensation		—			—			—			62,850			—			62,850
Comprehensive loss:
Net loss		—			—			—			—			(12,250,398	)		(12,250,398	)
Translation adjustment		—			—			—			(1,722	)		—			(1,722	)

Total comprehensive loss																	(12,252,120	)

Balance at December 31, 2001		13,327,002			133,270			70,712,174			(100,834	)		(35,114,726	)		35,629,884
Exercise of stock options		10,000			100			19,900			—			—			20,000
Issuance of common stock under the
Employee Stock Purchase Plan		152,737			1,528			163,043			—			—			164,571
Stock repurchase program		(608,900	)		(6,090	)		(541,632	)		—			—			(547,722	)
Deferred compensation related to
option grants		—			—			1,858			(1,858	)		—			—
Amortization of deferred compensation		—			—			—			74,668			—			74,668
Comprehensive loss:
Net loss		—			—			—			—			(14,978,914	)		(14,978,914	)
Translation adjustment		—			—			—			6,746			—			6,746

Total comprehensive loss																	(14,972,168	)

Balance at December 31, 2002		12,880,839		$	128,808		$	70,355,343		$	(21,278	)	$	(50,093,640	)	$	20,369,233
Exercise of stock options		65,855			659			81,710			—			—			82,369
Issuance of common stock under the
Employee Stock Purchase Plan		195,876			1,959			123,972			—			—			125,931
Stock repurchase program		(153,400	)		(1,534	)		(138,099	)		—			—			(139,633	)
Amortization of deferred compensation		—			—			—			40,545			—			40,545
Comprehensive loss:
Net loss		—			—			—			—			(9,628,399	)		(9,628,399	)
Translation adjustment		—			—			—			22,089			—			22,089

Total comprehensive loss																	(9,606,310	)

Balance at December 31, 2003		12,989,170		$	129,892		$	70,422,926		$	(41,356	)	$	(59,722,039	)	$	10,872,135

See accompanying notes.

Vascular Solutions, Inc.

Consolidated Statements of Cash Flows

	Year Ended December 31
	2003			2002			2001
Operating activities
Net loss	$	(9,628,399	)	$	(14,978,914	)	$	(12,250,398	)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation		386,196			502,390			432,721
Amortization		217,500			145,000			—
Value of options granted for services		—			—			10,398
Deferred compensation expense		40,545			74,668			62,850
Changes in operating assets and liabilities:
Accounts receivable		(452,497	)		(72,935	)		686,372
Inventories		(1,053,758	)		113,455			684,082
Prepaid expenses		(135,381	)		(36,885	)		(58,637	)
Accounts payable		(20,316	)		26,222			(22,191	)
Accrued compensation and expenses		229,370			(78,309	)		(481,583	)

Net cash used in operating activities		(10,416,740	)		(14,305,308	)		(10,936,386	)
Investing Activities
Purchase of Acolysis assets		—			(1,550,203	)		—
Purchase of property and equipment		(538,913	)		(356,696	)		(456,206	)
Purchase of securities		(10,695,249	)		(33,173,021	)		(25,300,530	)
Proceeds from sales of securities		22,590,000			42,485,052			24,423,770

Net cash provided by (used in) investing activities		11,355,838			7,405,132			(1,332,966	)
Financing Activities
Proceeds from exercise of stock options		82,369			20,000			305,304
Net proceeds from sale of common stock		125,931			164,571			309,562
Repurchase of common stock		(139,633	)		(547,722	)		—

Net cash provided (used in) by financing activities		68,667			(363,151	)		614,866
Effect of exchange rate changes on cash and cash
equivalents		22,089			6,746			(1,722	)

Increase (decrease) in cash and cash equivalents		1,029,854			(7,256,581	)		(11,656,208	)
Cash and cash equivalents at beginning of year		1,835,059			9,091,640			20,747,848

Cash and cash equivalents at end of year	$	2,864,913		$	1,835,059		$	9,091,640

See accompanying notes.

1. Description of Business

Vascular Solutions, Inc. (the Company) is a medical device company focused on bringing solutions to interventional cardiologists and interventional radiologists. The Company’s product line includes the Duett™ sealing device, the D-Stat™ flowable hemostat, the D-Stat Dry bangage, the D-Stat Radial hemostat band, the Vari-Lase endovenous laser procedure kit & laser, the Pronto extraction catheter and the Acolysis®therapeutic ultrasound system. As a vertically-intergrated medical device company, the Company generates ideas and creates new interventional medical devices, and then delivers those products directly to the physician through its direct domestic sales force and international distribution network. The Duett sealing device is designed to provide a complete seal of the puncture site following catheterization procedures such as angiography, angioplasty and stenting. The D-Stat flowable hemostat is a thick, yet flowable blood clotting material that is used in a wide variety of interventional medical procedures for the local control of bleeding. The D-Stat Dry bandage consists of a freeze-dried pad of the D-Stat procoagulant which can be applied to topical bleeding with a custom adhesive bandage. The D-Stat Radial is a customized compression device containing a freeze-dried pad of the D-Stat procoagulant for sealing the arterial puncture following catheterization procedures utilizing the radial artery in the wrist. The Vari-Lase product is a treatment for superficial venous reflux, otherwise known as varicose veins. The Pronto extraction catheter consists of a catheter with a proprietary atraumatic distal tip and large extraction lumen for the removal of soft thrombus from arteries. The Acolysis intravascular therapeutic ultrasound system delivers ultrasound waves to lyse blood clots and plaque in arteries. The Acolysis system is not available for sale in the United States. The Company was incorporated in December 1996 and began operations in February 1997.

2. Summary of Significant Accounting Policies

Basis of Consolidation

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

Foreign Currency Translation and Transactions

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

Comprehensive Loss

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

Use of Estimates

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

2. Summary of Significant Accounting Policies (continued)

Cash and Cash Equivalents

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

Available-for-Sale Securities

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

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

	2003		2002
Corporate Debt		2,021,567		10,383,681
U.S. Government Obligations		998,126		4,530,763

	$	3,019,693	$	14,914,444

Inventories

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

	2003		2002
Raw materials	$	2,100,775	$	1,561,943
Work-in-process		260,887		138,134
Finished goods		824,612		432,439

	$	3,186,274	$	2,132,516

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.

2. Summary of Significant Accounting Policies (continued)

Revenue Recognition

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

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

Research and Development Costs

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

Stock-Based Compensation

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

	Year Ended December 31
	2003			2002			2001
Net loss, as reported	$	(9,628,399	)	$	(14,978,914	)	$	(12,250,398	)
Deduct: Total stock-based employee compensation
expense determined under fair-value-based
method for all awards		(573,355	)		(2,340,094	)		(2,631,693	)

Pro forma net loss	$	(10,201,754	)	$	(17,319,008	)	$	(14,882,091	)

Net loss per share:
Basic and diluted - as reported	$	(0.75	)	$	(1.13	)	$	(0.93	)

Basic and diluted - pro forma	$	(0.79	)	$	(1.30	)	$	(1.13	)

2. Summary of Significant Accounting Policies (continued)

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


Expected life (years)	6	.38	6	.50	7	.00
Expected volatility	0	.98	1	.01	1	.21
Risk-free interest rate	3	.54%	4	.30%	4	.88%

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

Income Taxes

Income taxes are accounted for under the liability method. Deferred income taxes are provided for temporary differences between the financial reporting and the tax bases of assets and liabilities.

Concentrations of Credit Risk

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

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

Net Loss Per Share

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

Reclassifications

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

2. Summary of Significant Accounting Policies (continued)

Goodwill and Other Intangible Assets

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

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

New Accounting Pronouncements

3. Acquisition of Certain Assets of Angiosonics, Inc.

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

4. Goodwill and Other Intangible Assets

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

4. Goodwill and Other Intangible Assets (continued)

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

	Carrying Amount		Accumulated Amortization		Net
Amortizing intangibles:
Purchased technology	$	870,000	$	362,500	$	507,500
Non-amortizing intangibles:
Goodwill		192,595		—		192,595

	$	1,062,595	$	362,500	$	700,095

5. Property and Equipment

Property and equipment consists of the following at December 31:

	2003			2002
Property and equipment:
Manufacturing equipment	$	1,174,787		$	1,017,283
Office and computer equipment		875,431			817,143
Furniture and fixtures		240,359			242,694
Leasehold improvements		123,614			143,079
Research and development equipment		289,014			287,964

		2,703,205			2,508,163
Less accumulated depreciation		(1,754,603	)		(1,712,278	)

Net property and equipment	$	948,602		$	795,885

6. Line of Credit

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

7. Leases

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

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

2004		348,948
2005		348,948
2006		363,132
2007		370,224
2008		277,668

	$	1,708,920

8. Income Taxes

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

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

	2003			2002
Deferred tax assets:
Net operating loss carryforwards	$	22,394,000		$	18,452,000
Tax credit carryforwards		1,353,000			1,206,000
Depreciation and amortization		183,000			129,000
Accrued compensation		131,000			88,000
Other allowances		64,000			94,000
Inventory reserve		96,000			104,000

		24,223,000			20,073,000
Less valuation allowances		(24,223,000	)		(20,073,000	)

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.

8. Income Taxes (continued)

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


Tax at statutory rate	34	.0%	34	.0%	34	.0%
State income taxes, net of federal bendfit	6	.0	6	.0	6	.0
Meals and entertainment	1	.0	1	.0	1	.0
Federal research credits	1	.0	—		—
Impact of net operating loss carryforward	(42	.0)	(41	.0)	(41	.0)

Effective income tax rate	—	%	—	%	—	%

9. Stock Options and Warrants

Stock Option Plan

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

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

9. Stock Options and Warrants (continued)

Option activity is summarized as follows:

					Exercise Price	Weighted Average Exercise Price
Balance at December 31, 2000	174,629		1,070,771		$ 1.50 - $16.50	$	5	.85
Shares reserved	500,000		—		—		—
Granted	(972,000	)	972,000		2.51 - 7.48		05	.35
Exercised	—		(120,800	)	1.50 - 7.00		2	.53
Canceled	347,160		(347,160	)	1.50 - 6.50		7	.41

Balance at December 31, 2001	49,789		1,574,811		1.50 - 16.50		5	.45
Shares reserved	500,000		—		—		—
Granted	(186,000	)	186,000		0.81 - 2.70		1	.83
Exercised	—		(10,000	)	$ 2.00		2	.00
Canceled	849,890		(849,890	)	1.45 - 16.50		6	.25

Balance at December 31, 2002	1,213,679		900,921		0.81 - 16.50		3	.94
Shares reserved	500,000		—		—		—
Granted	(889,070	)	889,070		0.78 - 5.74		0	.89
Exercised	—		(65,855	)	0.78 - 2.70		1	.25
Canceled	218,965		(218,965	)	0.81 - 16.50		2	.49

Balance at December 31, 2003	1,043,574		1,505,171		$ 0.78 - $12.00	$	2	.50

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

	Options Outstanding								Options Exercisable
Range of Exercise Prices	Outstanding as of December 31, 2003		Weighted Average Remaining Contractual Life			Weighted Average Exercise Price			Exercisable as of December 31, 2003		Weighted Average Exercise Price
$ 0.78 - $ 0.83		90,750		9	.1	$	0	.79		76,600	$	0	.79
0.84 - 0.84		686,860		9	.1	$	0	.84		290,140		0	.84
0.85 - 2.51		328,211		6	.6	$	2	.10		237,311		2	.02
2.52 - 7.00		310,650		6	.2	$	5	.61		293,870		5	.68
7.01 - 12.00		88,700		7	.1		7	.65		61,430		7	.78

		1,505,171		7	.9	$	2	.50		959,351	$	3	.05

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

Deferred Compensation

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

9. Stock Options and Warrants (continued)

Warrants

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

Exercise Price
$	5	.00	100,000	June 10, 2004
	1	.50	75,500	January 31, 2007
	1	.50	24,500	February 14, 2007
	3	.00	68,000	December 29, 2007

$	3	.19	268,000

10. Employee Stock Purchase Plan

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

11. Stock Repurchase Program

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

12. Employee Retirement Savings Plan

The Company has an employee 401(k) retirement savings plan (the Plan). The Plan provides eligible employees with an opportunity to make tax-deferred contributions into a long-term investment and savings program. All employees over the age of 21 are eligible to participate in the Plan beginning with the first quarterly open enrollment date following start of employment. Through December 31, 2001, the Plan allowed eligible employees to contribute up to 18% of their annual compensation. Effective January 1, 2002, the employee contribution limit was increased to 50% of their annual compensation, subject to a maximum limit determined by the Internal Revenue Service, with the Company contributing an amount equal to 25% of the first 5% contributed to the Plan. The Company recorded an expense of $74,258, $91,170, and $112,084 for contributions to the Plan for the years ended December 31, 2003, 2002, and 2001, respectively.

13. Concentrations of Credit and Other Risks

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

13. Concentrations of Credit and Other Risks (continued)

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

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

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

			2003			2002			2001
Domestic				87	%		89	%		90	%
Foreign				13			11			10

14. Dependence on Key Suppliers

The Company purchases certain key components from single-source suppliers. Any significant component delay or interruption could require the Company to qualify new sources of supply, if available, and could have a material adverse effect on the Company’s financial condition and results of operations. The Company purchases their requirements for thrombin (a component in the Duett and D-Stat products) under a Purchase Agreement dated June 10, 1999 with a subsidiary of King Pharmaceuticals, Inc. The agreement provides for a fixed price, with adjustments based on the supplier’s manufacturing costs and the supplier’s annual percentage increase in the wholesale price of thrombin. The agreement expires on May 29, 2005. During 2004 and the first half of 2005, the Company intends to increase its purchases of thrombin to benefit from the pricing provisions of the agreement, which the Company expects will substantially increase their inventory of thrombin. The Company believes that these purchases will satisfy its thrombin requirements for 2004, 2005 and most of 2006. The Company is currently exploring a new thrombin supply agreement and evaluating alternative potential suppliers, although there currently is no other source of commercially-available thrombin approved for use in the United States.

15. Commitments and Contingencies

Datascope Litigation

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

15. Commitments and Contingencies (continued)

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

St. Jude Medical Litigation

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

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

Diomed Litigation

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

MedArt Purchase Commitment

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

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

2003	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
Net sales	$	2,968		$	2,725		$	2,708		$	3,403
Gross profit		1,746			1,639			1,607			2,242
Operating loss		(2,659	)		(2,724	)		(2,415	)		(1,981	)
Net loss		(2,597	)		(2,683	)		(2,385	)		(1,963	)
Basic and diluted net loss
per share	$	(0.20	)	$	(0.21	)	$	(0.19	)	$	(0.15	)
2002
Net sales	$	2,803		$	3,329		$	3,041		$	2,928
Gross profit		1,597			2,002			1,817			1,699
Operating loss		(3,689	)		(2,871	)		(2,777	)		(6,149	)
Net loss		(3,551	)		(2,743	)		(2,634	)		(6,051	)
Basic and diluted net loss
per share	$	(0.27	)	$	(0.20	)	$	(0.20	)	$	(0.46	)

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

EX-10.14 3 vasc041035_ex10-14.txt EXHIBIT 10.14 This LOAN AND SECURITY AGREEMENT dated as of the Effective Date, between SILICON VALLEY BANK ("Bank"), whose address is 5775 Wayzata Boulevard, Suite 700, Minneapolis, Minnesota 55416 and VASCULAR SOLUTIONS, INC., a Minnesota corporation ("Borrower"), whose address is 6464 Sycamore Court, Minneapolis, Minnesota 55369, provides the terms on which Bank will lend to Borrower and Borrower will repay Bank. The parties agree as follows: 1. ACCOUNTING AND OTHER TERMS Accounting terms not determined in this Agreement will be construed following GAAP. Calculations and determinations must be made following GAAP. The term "financial statements" includes the notes and schedules, if any. The terms "including" and "includes" always mean "including (or includes) without limitation," in this or any Loan Document. 2. LOAN AND TERMS OF PAYMENT 2.1 PROMISE TO PAY. Borrower promises to pay Bank the unpaid principal amount of all Credit Extensions and interest on the unpaid principal amount of the Credit Extensions. 2.1.1 REVOLVING ADVANCES. (a) Bank will make Revolving Advances not exceeding the lesser of (A) the Committed Revolving Line and (B) the Borrowing Base. Amounts borrowed under this Section may be repaid and reborrowed during the term of this Agreement. (b) To obtain a Revolving Advance, Borrower must notify Bank by facsimile or telephone by 12:00 p.m. Pacific time on the Business Day the Revolving Advance is proposed to be made. Borrower must promptly confirm the notification by delivering to Bank the Payment/Advance Form, in the form attached hereto as Exhibit B. Bank will credit Revolving Advances to Borrower's deposit account. Bank may make Revolving Advances under this Agreement based on instructions from a Responsible Officer or his or her designee or without instructions if any such Revolving Advances are necessary to meet Obligations which have become due. Bank may rely on any telephonic notice given by a person whom Bank in its good faith business judgment believes is a Responsible Officer or such Person's designee (with the status of a designee derived from written instructions from Borrower to Bank or specific verbal instructions from a Responsible Officer), and Borrower hereby indemnifies Bank for any loss Bank suffers due to any such reliance. (c) The Committed Revolving Line terminates on the Revolving Maturity Date, when all Revolving Advances and related Obligations are immediately payable. (d) Bank's obligation to lend the undisbursed portion of the Obligations will terminate if, in Bank's sole discretion, there has been a material adverse change in the general affairs, management, results of operation, condition (financial or otherwise) or the prospect of repayment of the Obligations, or there has been any material adverse deviation by Borrower from the most recent business plan of Borrower presented to and accepted by Bank prior to the execution of this Agreement. 2.2 OVERADVANCES. If Borrower's Obligations under Section 2.1.1 exceed any of the applicable lending limitations set forth therein, Borrower must immediately pay Bank the excess. Bank, under its ordinary practices, will be in contact with the Borrower concerning any such excess, provided that Borrower understands and agrees that Borrower's obligation to repay any such excess is not conditioned on the giving of any notice or communication of any type by Bank to Borrower . 2.3 INTEREST RATE, PAYMENTS. (a) Interest Rate. Revolving Advances accrue interest on the outstanding principal balance at a PER ANNUM rate equal to the greater of (i) 4.50% or (ii) one-half of one percentage point (0.50%) above the Prime Rate. After an Event of Default has occurred and is continuing, Obligations accrue interest at five (5) percentage points above the rate effective immediately before such Event of Default occurred. The interest rate increases or decreases when the Prime Rate changes. Interest is computed on a 360 day year for the actual number of days elapsed. (b) Payments. Interest due on the Committed Revolving Line is payable on the 25th day of each month for the period ending at the end of the day preceding such 25th day. Bank may debit any of Borrower's deposit accounts at Bank for principal and interest payments owing or any amounts Borrower owes Bank. Bank will promptly notify Borrower when it debits Borrower's accounts. These debits are not a set-off. Payments received after 12:00 noon Pacific time are considered received at the opening of business on the next Business Day. When a payment is due on a day that is not a Business Day, the payment is due the next Business Day and additional fees or interest accrue. 2.4 FEES. (a) Facility Fee. Borrower shall pay to Bank a fee of $15,000 concurrently with the making of the first Revolving Advance hereunder, which shall be in addition to interest and to all other amounts payable hereunder and which shall not be refundable. (b) Bank Expenses. Borrower shall pay to the Bank all Bank Expenses (including reasonable attorneys' fees and expenses) incurred through and after the Closing Date when due. (c) Unused Line Fee. Borrower shall pay to the Bank $1,250 per each quarter (or partial quarter) during the term hereof as long as no Advances have been made during such quarter, with such fee due and payable, if applicable, on the fir st day of each quarter with respect to the then immediately preceding quarter or partial quarter period, with the first of such payments due on April 1, 2004. However, on and after such time that the facility fee as described in 2.4(a) is payable by the Borrower, any and all unused line fees paid hereunder prior to such date shall be applied and credited to the such facility fee and Borrower shall thereupon only be responsible for the payment of such facility fee less the aggregate amount of such unused line fees so credited. 3. CONDITIONS OF LOANS 3.1 CONDITIONS PRECEDENT TO INITIAL CREDIT EXTENSION. Bank's obligation to make the initial Credit Extension is subject to the condition precedent that it receive the agreements, documents and fees it requires in its good faith business judgment, and shall include, without limitation, the satisfaction of the audit condition set forth in Section 6.2(d) hereof. -2- 3.2 CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS. Bank's obligations to make each Credit Extension, including the initial Credit Extension, is subject to the following: (a) timely receipt of any Payment/Advance Form; and (b) the representations and warranties in Section 5 must be materially true on the date of the Payment/Advance Form and on the effective date of each Credit Extension (each a "Bring Down Date") (except to the extent they related specifically to an earlier date, in which case such representations and warranties shall remain materially true and accurate as of such specific date on the Bring Down Date) and no Default or Event of Default may have occurred and be continuing, or result from the Credit Extension. Each Credit Extension is Borrower's representation and warranty on that date that the representations and warranties of Section 5 remain true (except to the extent they related specifically to an earlier date, in which case such representations and warranties shall remain materially true and accurate as of such specific date on the Bring Down Date). 4. CREATION OF SECURITY INTEREST 4.1 GRANT OF SECURITY INTEREST. Borrower grants Bank a continuing security interest in all presently existing and later acquired Collateral to secure all Obligations and performance of each of Borrower's duties under the Loan Documents. Except for Permitted Liens, any security interest will be a first priority security interest in the Collateral. If this Agreement is terminated, Bank's lien and security interest in the Collateral will continue until Borrower fully satisfies its Obligations, other than for Inchoate Indemnities. 4.2 AUTHORIZATION TO FILE. Borrower authorizes Bank to file financing statements without notice to Borrower, with all appropriate jurisdictions, as Bank deems appropriate, in order to perfect or protect Bank's interest in the Collateral. 5. REPRESENTATIONS AND WARRANTIES Borrower represents and warrants as follows: 5.1 DUE ORGANIZATION AND AUTHORIZATION. Each of Borrower and each Subsidiary is duly existing and in good standing in its state of formation and qualified and licensed to do business in, and in good standing in, any state in which the conduct of its business or its ownership of property requires that it be qualified, except where the failure to do so could not reasonably be expected to cause a Material Adverse Change. The execution, delivery and performance of the Loan Documents have been duly authorized, and do not conflict with Borrower's formation documents, nor constitute an event of default under any material agreement by which Borrower is bound. Borrower is not in default under any agreement to which or by which it is bound in which the default could reasonably be expected to cause a Material Adverse Change. -3- 5.2 COLLATERAL. Borrower has good title to the Collateral and the Intellectual Property, free of Liens except Permitted Liens and Borrower has Rights to each asset that is Collateral. Borrower has no other deposit account, other than the deposit accounts described in the Schedule. The Accounts are bona fide, existing obligations, and the service or property has been performed or delivered to the account debtor or its agent for immediate shipment to and unconditional acceptance by the account debtor. The Collateral is not in the possession of any third party bailee (such as at a warehouse), except to the extent that purchased components of inventory are located, in the ordinary course of business, at the sites of contract manufacturers and with the further understanding that no inventory that is located at such a third party site shall be considered Eligible Inventory hereunder. In the event that Borrower, after the date hereof, intends to store or otherwise deliver the Collateral to such a bailee, then Borrower will receive the prior written consent of Bank and such bailee must acknowledge in writing that the bailee is holding such Collateral for the benefit of Bank. Borrower has no notice of any actual or imminent Insolvency Proceeding of any account debtor whose accounts are an Eligible Account in any Borrowing Base Certificate. All Inventory is in all material respects of good and marketable quality, free from material defects. Borrower is the sole owner of, or a licensee of, the Intellectual Property, except for non-exclusive licenses granted to its customers in the ordinary course of business. Each Patent is valid and enforceable (subject to the ability of the Borrower to abandon rights to certain Intellectual Property as set forth in Section 6.8 hereof) and no part of the Intellectual Property has been judged invalid or unenforceable, in whole or in part, and no claim has been made that any part of the Intellectual Property violates the rights of any third party, except to the extent such claim could not reasonably be expected to cause a Material Adverse Change. 5.3 LITIGATION. Except as shown in the Schedule, there are no actions or proceedings pending or, to the knowledge of Borrower's Responsible Officers, threatened by or against Borrower or any Subsidiary in which a likely adverse decision could reasonably be expected to cause a Material Adverse Change. With respect to the litigation identified on the Schedule, Borrower shall supply to Bank all current pleadings and other applicable information for Bank's review and evaluation; Borrower shall assist Bank in its evaluation thereof, with the specific understanding that no loans are to be made hereunder until such time as the Bank determines, in its good faith business judgment, that the litigation and the matters pertaining thereto are acceptable to Bank. 5.4 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS. All consolidated financial statements for Borrower, and any Subsidiary, delivered to Bank fairly present in all material respects Borrower's consolidated financial condition and Borrower's consolidated results of operations, subject to normal year end audit adjustments for interim financial statements. There has not been any material deterioration in Borrower's consolidated financial condition since the date of the most recent financial statements submitted to Bank. 5.5 SOLVENCY. The fair salable value of Borrower's assets as a going concern (including goodwill minus disposition costs) exceeds the fair value of its liabilities; the Borrower is not left with unreasonably small capital after the transactions in this Agreement; and Borrower is able to pay its debts (including trade debts) as they mature. -4- 5.6 REGULATORY COMPLIANCE. Borrower is not an "investment company" or a company "controlled" by an "investment company" under the Investment Company Act. Borrower is not engaged as one of its important activities in extending credit for margin stock (under Regulations T and U of the Federal Reserve Board of Governors). Borrower has complied in all material respects with the Federal Fair Labor Standards Act. Borrower has not violated any laws, ordinances or rules, the violation of which could reasonably be expected to cause a Material Adverse Change. None of Borrower's or any Subsidiary's properties or assets has been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge, by previous Persons, in disposing, producing, storing, treating, or transporting any hazardous substance other than legally. Borrower and each Subsidiary has timely filed all required tax returns and paid, or made adequate provision to pay, all material taxes, except those being contested in good faith with adequate reserves under GAAP. Borrower and each Subsidiary has obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all government authorities that are necessary to continue its business as currently conducted, except where the failure to do so could not reasonably be expected to cause a Material Adverse Change. 5.7 SUBSIDIARIES. Borrower does not own any stock, partnership interest or other equity securities except for Permitted Investments. 5.8 FULL DISCLOSURE. No written representation, warranty or other statement of Borrower in any certificate or written statement given to Bank (taken together with all such writ ten certificates and written statements to Bank) contains any untrue statement of a material fact or, when taken as a whole, omits to state a material fact necessary to make the statements contained in the certificates or statements not misleading in light of the circumstances in which they were made, with it being recognized by Bank that the projections and forecasts provided by Borrower in good faith and based upon reasonable assumptions are not viewed as facts and that actual results during the period or periods covered by such projections and forecasts may differ from the projected and forecasted results. 5.9 LIEN STATUS OF CERTAIN PURCHASED ASSETS. All assets purchased pursuant to that certain Asset Purchase Agreement dated as of April 29, 2002 by and between Borrower and the secured creditors parties thereto with respect to certain assets of Angiosonics, Inc., which were subject to UCC lien filings in favor of such secured creditors as of the date of Borrower's purchase of such assets, were listed on the UCC amendments evidencing the full release of such assets from such UCC lien filings and which amendments were filed with the Delaware Secretary of State on May 31, 2002, and bearing UCC amendment filing numbers 2134515 and 2134520. 6. AFFIRMATIVE COVENANTS Borrower will do all of the following for so long as Bank has an obligation to lend or there are outstanding Obligations (other than for Inchoate Indemnities): 6.1 GOVERNMENT COMPLIANCE. Borrower will maintain its and its Subsidiaries' (if any) legal existence and good standing in the jurisdiction of formation of each and will maintain qualification of all such entities in each -5- applicable jurisdiction in which the failure to so qualify would reasonably be expected to cause a material adverse effect on Borrower's business or operations. Borrower will comply, and will cause each Subsidiary to comply, with all laws, ordinances and regulations to which such party is subject to the extent that noncompliance therewith could have a material adverse effect on Borrower's business or operations or could reasonably be expected to cause a Material Adverse Change. 6.2 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. (a) Borrower will deliver to Bank: (i) as soon as available, but no later than 30 days after the last day of each month, a company prepared consolidated balance sheet and income statement covering Borrower's consolidated operations during the period certified by a Responsible Officer and in a form acceptable to Bank and, Borrower shall concurrently therewith provide to Bank a description regarding any material variances that have occurred with respect to Borrower's financial projections during such period (with the understanding that Borrower may from time to time modify such projections and agrees to provide Bank with copies of any such modifications); (ii) as soon as available, but no later than 90 days after the last day of Borrower's fiscal year, audited consolidated financial statements prepared under GAAP, consistently applied, together with an unqualified opinion on the financial statements from an independent certified public accounting firm reasonably acceptable to Bank; (iii) a prompt report of any legal actions pending or threatened against Borrower or any Subsidiary that could result in damages or costs to Borrower or any Subsidiary of $100,000 or more; and (iv) budgets, sales projections, operating plans or other financial information Bank reasonably requests, including, without limitation, financial projections (covering such matters and in such form as Bank shall reasonably request) for each fiscal year, and which are to be delivered to Bank prior the start of such fiscal year. (b) Within 30 days after the last day of each month while any Revolving Advances are outstanding (and in any event delivered in conjunction with a request for a Revolving Advance when no such Revolving Advances are then outstanding), Borrower will deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in the form of Exhibit C hereto, with aged listings of accounts receivable and accounts payable, in each case by invoice date, and together with an inventory report in form and substance acceptable to Bank. Further, when no Revolving Advances are outstanding Borrower shall deliver to Bank the foregoing Borrowing Base Certificate, and together with aged listings of accounts receivable and accounts payable, together with an inventory report in form and substance acceptable to Bank all within 30 days after the end of each quarter. (c) Within 30 days after the last day of each month, Borrower will deliver to Bank with the monthly financial statements a Compliance Certificate signed by a Responsible Officer in the form of Exhibit D. (d) Allow Bank to audit Borrower's Collateral at Borrower's expense. Such audits will be conducted no more often than every 12 months unless a Default or Event of Default has occurred and is continuing. Further, as a condition to the making of any Advances hereunder, Bank shall conduct a Collateral audit and general field examination which shall produce results that are acceptable to Bank in its good faith business judgment. 6.3 INVENTORY; RETURNS. Borrower will keep all Inventory in good and marketable condition, free from material defects. Returns and allowances between Borrower and its account debtors will follow Borrower's customary practices as they exist at execution of this Agreement. Borrower must -6- promptly notify Bank of all returns, recoveries, disputes and claims, that involve more than $50,000. 6.4 TAXES. Borrower will make, and cause each Subsidiary to make, timely payment of all material federal, state, and local taxes or assessments (other than taxes and assessments which Borrower is contesting in good faith, with adequate reserves maintained in accordance with GAAP) and will deliver to Bank, on demand, appropriate certificates attesting to the payment. 6.5 INSURANCE. Borrower will keep its business and the Collateral insured for risks and in amounts standard for Borrower's industry, and as Bank may reasonably request. Insurance policies will be in a form, with companies, and in amounts that are satisfactory to Bank in Bank's reasonable discretion. All property policies will have a lender's loss payable endorsement showing Bank as an additional loss payee and all liability policies will show the Bank as an additional insured and provide that the insurer must give Bank at least 20 days notice before canceling its policy. At Bank's request, Borrower will deliver certified copies of policies and evidence of all premium payments. Proceeds payable under any policy will, at Bank's option, be payable to Bank on account of the Obligations. 6.6 PRIMARY ACCOUNTS. Borrower will maintain (A) its operating bank accounts with Bank and (B) 80% of all excess cash and investments balances at or through Bank. Further, as to any amounts that are on deposit at institutions other than at the Bank, Borrower shall cause such other institutions to enter into account control agreements in favor of Bank in order to allow the Bank perfect its lien therein and with such agreements and provisions as are reasonably acceptable to Bank. 6.7 FINANCIAL COVENANTS. Borrower will maintain at all times: (i) TANGIBLE NET WORTH. A Tangible Net Worth of at least $8,000,000. (ii) LIQUIDITY COVERAGE. A ratio of (A) unrestricted domestic cash (and equivalents) plus the product of the aggregate amount of Eligible Accounts multiplied by the applicable advance rate for the making of Revolving Advances hereunder with respect to Eligible Accounts, divided by (B) the aggregate amount of Obligations outstanding hereunder, of not less than 1.25 to 1.00. 6.8 INTELLECTUAL PROPERTY. Borrower will (i) protect, defend and maintain the validity and enforceability of all material Intellectual Property and promptly advise Bank in writing of material infringements and (ii) not allow any Intellectual Property material to Borrower's business to be abandoned, forfeited or dedicated to the public without Bank's written consent. 6.9 FURTHER ASSURANCES. Borrower will execute any further instruments and take further action as Bank reasonably requests to perfect or continue Bank's security interest in the Collateral or to effect the purposes of this Agreement. -7- 7. NEGATIVE COVENANTS Borrower will not do any of the following without Bank's prior written consent, which will not be unreasonably withheld, for so long as Bank has an obligation to lend or there are any outstanding Obligations other than for Inchoate Indemnities: 7.1 DISPOSITIONS. Convey, sell, lease, transfer or otherwise dispose of (collectively "Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, except for Transfers (i) of Inventory in the ordinary course of business; (ii) of non-exclusive licenses and similar arrangements for the use of the property of Borrower or any Subsidiary in the ordinary course of business; (iii) of worn-out or obsolete Equipment; or (iv) that arise from the making of Permitted Investments. Further, Bank agrees to facilitate the dispositions in clause (iii) above with respect to a release of the Bank's lien therein on terms acceptable to Bank, subject, in all cases, to the first priority lien right in any and all proceeds arising therefrom. 7.2 CHANGES IN BUSINESS, OWNERSHIP, MANAGEMENT OR BUSINESS LOCATIONS. Engage in or permit any Subsidiary to engage in any business other than the businesses currently engaged in by Borrower or reasonably related thereto or have a material change in its management or its ownership of greater than 25% (other than by the sale of Borrower's equity securities in a public offering or to venture capital investors so long as Borrower identifies the venture capital investors prior to the closing of the investment). Borrower will not, without at least 30 days prior written notice, relocate its chief executive office or add any new offices or business locations in which Borrower maintains or stores over $15,000 in Borrower's assets or property. 7.3 MERGERS OR ACQUISITIONS. Merge or consolidate, or permit any Subsidiary to merge or consolidate, with any other Person, or acquire, or permit any Subsidiary to acquire, all or substantially all of the capital stock or property of another Person, except where: (i) no Default or Event of Default has occurred and is continuing or would result from such action during the term of this Agreement; (ii) such transaction would not result in a decrease of more than 25% of Tangible Net Worth; and (iii) upon the acquisition of any other Person as otherwise permitted pursuant to the terms of this Section, such Person become an appropriate obligor relating to the Obligations hereunder, as the Bank may determine, and shall execute such agreements, documents and instruments as are reasonably necessary or appropriate, as the Bank may determine, in order to evidence such debt obligations and to establish a first priority security interest in the personal property assets of such Person in favor of Bank, subject to Permitted Liens. A Subsidiary may merge or consolidate into another Subsidiary or into Borrower as long as no Default or Event of Default has occurred and is continuing prior to the proposed transaction or would otherwise arise thereafter as a direct or indirect result thereof. 7.4 INDEBTEDNESS. Create, incur, assume, or be liable for any Indebtedness, or permit any Subsidiary to do so, other than Permitted Indebtedness. 7.5 ENCUMBRANCE. Create, incur, or allow any Lien on any of its property, or assign or convey any right to receive income, including the sale of any Accounts, or permit any Subsidiary to do so, except for -8- Permitted Liens, or permit the Bank's first priority lien in the Collateral to change, subject only to Permitted Liens as may be applicable and subject to the provisions of Section 7.1 hereof regarding the Transfer of wornout or obsolete equipment as more specifically set forth in Section 7.1, provided, further, with respect to Inventory, it is understood that under Section 9320(a) of the Code, a buyer thereof in the ordinary course of business shall take such Inventory free of the Lien of Bank hereunder, subject to the Lien of the Bank in any and all proceeds thereof. 7.6 DISTRIBUTIONS; INVESTMENTS. Directly or indirectly acquire or own any Person, or make any Investment in any Person, other than Permitted Investments, or permit any Subsidiary to do so. Pay any dividends or make any distribution or other payment, redemption, retirement or re-purchase of any of its capital stock, provided that Borrower may redeem or repurchase for cash, at fair value, the capital stock of Borrower (or options to purchase capital stock) from any employee of Borrower upon the death, disability, retirement or other termination of such employee, if (i) no Default or Event of Default shall have occurred and be continuing or shall result from the same, and (ii) the total amount paid in all of the foregoing transactions shall not exceed $50,000 in any fiscal year of Borrower. 7.7 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower except for transactions that are in the ordinary course of Borrower's business, upon fair and reasonable terms that are no less favorable to Borrower than would be obtained in an arm's length transaction with a nonaffiliated Person, provided that the foregoing restrictions shall not apply to (i) redemptions or repurchases of Borrower's stock otherwise permitted under Section 7.6, or (ii) employment arrangements (including arrangements made with respect to bonuses) entered into in the ordinary course of business consistent with past business practices with members of the Board of Directors and officers of Borrower, provided that no Default or Event of Default has occurred and is continuing or that no Default or Event of Default would arise upon the the making of any such employment arrangement or upon the effectiveness thereof. 7.8 SUBORDINATED DEBT. Make or permit any payment on any Subordinated Debt, except under the terms of the Subordinated Debt, or amend any provision in any document relating to the Subordinated Debt without Bank's prior written consent. 7.9 COMPLIANCE. Become an "investment company" or a company controlled by an "investment company," under the Investment Company Act of 1940 or undertake as one of its important activities extending credit to purchase or carry margin stock, or use the proceeds of any Credit Extension for that purpose; fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards Act or violate any other law or regulation, if the violation could reasonably be expected to have a material adverse effect on Borrower's business or operations or would reasonably be expected to cause a Material Adverse Change, or permit any of its Subsidiaries to do so. 8. EVENTS OF DEFAULT Any one of the following is an "Event of Default" hereunder: -9- 8.1 PAYMENT DEFAULT. If Borrower fails to pay any of the Obligations within 3 days after their due date. During such additional 3 day period the failure to cure such payment default is not an Event of Default hereunder (but no Credit Extension will be made during the cure period); 8.2 COVENANT DEFAULT. (A) If Borrower does not perform any obligation in Sections 6.1, 6.2, 6.5, 6.6, and 6.7 or violates any covenant in Section 7; or (B) If Borrower does not perform or observe any other material term, condition or covenant in this Agreement (other than as referenced in the Section 8.1 or 8.2(A)), any Loan Documents, or in any agreement between Borrower and Bank and as to any default under a term, condition or covenant that can be cured, has not cured the default within 10 days after it occurs, or if the default cannot be cured within 10 days or cannot be cured after Borrower's attempts within 10 day period, and the default may be cured within a reasonable time, then Borrower has an additional period (of not more than 30 days) to attempt to cure the default. During the additional time, the failure to cure the default is not an Event of Default (but no Credit Extensions will be made during the cure period); 8.3 MATERIAL ADVERSE CHANGE. If there (i) occurs a material adverse change in the business, operations, or condition (financial or otherwise) of the Borrower, or (ii) is a material impairment of the prospect of repayment of any portion of the Obligations or (iii) is a material impairment of the value or priority of Bank's security interests in the Collateral (any of the foregoing is referred to herein as a "Material Adverse Change"). 8.4 ATTACHMENT. If any material portion of Borrower's assets is attached, seized, levied on, or comes into possession of a trustee or receiver and the attachment, seizure or levy is not removed in 10 days, or if Borrower is enjoined, restrained, or prevented by court order from conducting a material part of its business or if a judgment or other claim becomes a Lien on a material portion of Borrower's assets, or if a notice of lien, levy, or assessment is filed against any of Borrower's assets by any government agency and not paid within 10 days after Borrower receives notice. These are not Events of Default if stayed or if a bond is posted pending contest by Borrower (but no Credit Extensions will be made during the cure period prior to obtaining a stay or posting a bond); 8.5 INSOLVENCY. If Borrower becomes insolvent or if Borrower begins an Insolvency Proceeding or an Insolvency Proceeding is begun against Borrower and not dismissed or stayed within 30 days (but no Credit Extensions will be made before any Insolvency Proceeding is dismissed); 8.6 OTHER AGREEMENTS. If there is a default in any agreement between Borrower and a third party that gives the third party the right to accelerate any Indebtedness exceeding $100,000 or that could reasonably be expected to cause a Material Adverse Change; -10- 8.7 JUDGMENTS. If a money judgment(s) in the aggregate of at least $50,000 is rendered against Borrower and is unsatisfied and unstayed for 10 days (but no Credit Extensions will be made before the judgment is stayed or satisfied); 8.8 MISREPRESENTATIONS. If Borrower or any Person acting for Borrower makes any material misrepresentation or material misstatement now or later in any warranty or representation in this Agreement or in any writing delivered to Bank or to induce Bank to enter this Agreement or any Loan Document; or 8.9 GUARANTY. Any guaranty of any Obligations ceases for any reason to be in full force or any Guarantor does not perform any obligation under any guaranty of the Obligations, or any material misrepresentation or material misstatement exists now or later in any warranty or representation in any guaranty of the Obligations or in any certificate delivered to Bank in connection with the guaranty, or any circumstance described in Sections 8.4, 8.5 or 8.7 occurs to any Guarantor. 9. BANK'S RIGHTS AND REMEDIES 9.1 RIGHTS AND REMEDIES. When an Event of Default occurs and continues Bank may, without notice or demand, do any or all of the following: (a) Declare all Obligations immediately due and payable (but if an Event of Default described in Section 8.5 occurs all Obligations are immediately due and payable without any action by Bank); (b) Stop advancing money or extending credit for Borrower's benefit under this Agreement or under any other agreement between Borrower and Bank; (c) Settle or adjust disputes and claims directly with account debtors for amounts, on terms and in any order that Bank considers advisable; (d) Make any payments and do any acts it considers necessary or reasonable to protect its security interest in the Collateral. Borrower will assemble the Collateral if Bank requires and make it available as Bank designates. Bank may enter premises where the Collateral is located, take and maintain possession of any part of the Collateral, and pay, purchase, contest, or compromise any Lien which appears to be prior or superior to its security interest and pay all expenses incurred. Borrower grants Bank a license to enter and occupy any of its premises, without charge, to exercise any of Bank's rights or remedies; (e) Apply to the Obligations any (i) balances and deposits of Borrower it holds, or (ii) any amount held by Bank owing to or for the credit or the account of Borrower; (f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell the Collateral. Bank is granted a non-exclusive, royalty-free license or other right to use, without charge, Borrower's labels, Patents, Copyrights, Mask Works, rights of use of any name, trade secrets, trade names, Trademarks, service marks, and advertising matter, or any similar property as it pertains to the Collateral, in completing production of, advertising for sale, -11- and selling any Collateral and, in connection with Bank's exercise of its rights under this Section, Borrower's rights under all licenses and all franchise agreements inure to Bank's benefit (to the extent permitted thereby or as otherwise may be permitted under law); and (g) Dispose of the Collateral according to the Code. 9.2 POWER OF ATTORNEY. Effective only when an Event of Default occurs and continues, Borrower irrevocably appoints Bank as its lawful attorney to: (i) endorse Borrower's name on any checks or other forms of payment or security; (ii) sign Borrower's name on any invoice or bill of lading for any Account or drafts against account debtors, (iii) make, settle, and adjust all claims under Borrower's insurance policies; (iv) settle and adjust disputes and claims about the Accounts directly with account debtors, for amounts and on terms Bank determines reasonable; and (v) transfer the Collateral into the name of Bank or a third party as the Code permits. Bank may exercise the power of attorney to sign Borrower's name on any documents necessary to perfect or continue the perfection of any security interest regardless of whether an Event of Default has occurred. Bank's appointment as Borrower's attorney in fact, and all of Bank's rights and powers under this Section 9.2, coupled with an interest, are irrevocable until all Obligations (other than for Inchoate Indemnities) have been fully repaid and performed and Bank's obligation to provide Credit Extensions terminates. 9.3 ACCOUNTS COLLECTION. When an Event of Default occurs and continues, Bank may notify any Person owing Borrower money of Bank's security interest in the funds and verify the amount of the Account. While any Obligations are outstanding, Borrower shall be deemed to collect all payments in trust for Bank and, if requested by Bank in its good faith business judgment, immediately deliver the payments to Bank in the form received from the account debtor, with proper endorsements for deposit. 9.4 BANK EXPENSES. If Borrower fails to pay any amount or furnish any required proof of payment to third persons, Bank may make all or part of the payment or obtain insurance policies required in Section 6.5, and take any action under the policies Bank deems prudent and Bank will apprise Borrower of any such actions in accordance with its customary procedures. Any amounts paid by Bank are Bank Expenses and immediately due and payable, bearing interest at the then applicable rate and secured by the Collateral. No payments by Bank are deemed an agreement to make similar payments in the future or Bank's waiver of any Event of Default. 9.5 BANK'S LIABILITY FOR COLLATERAL. If Bank complies with reasonable banking practices and the Code, it is not liable for: (a) the safekeeping of the Collateral; (b) any loss or damage to the Collateral; (c) any diminution in the value of the Collateral; or (d) any act or default of any carrier, warehouseman, bailee, or other person. Except as provided in the preceding sentence, Borrower bears all risk of loss, damage or destruction of the Collateral. 9.6 REMEDIES CUMULATIVE. Bank's rights and remedies under this Agreement, the Loan Documents, and all other agreements are cumulative. Bank has all rights and remedies provided under the Code, by law, or in equity. Bank's exercise of one right or remedy is not an election, and Bank's waiver of any -12- Event of Default is not a continuing waiver. Bank's delay is not a waiver, election, or acquiescence. No waiver is effective unless signed by Bank and then is only effective for the specific instance and purpose for which it was given. 9.7 DEMAND WAIVER. Borrower waives demand, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees held by Bank on which Borrower is liable. 10. NOTICES All notices or demands by any party about this Agreement or any other related agreement must be in writing and be personally delivered or sent by an overnight delivery service, by certified mail, postage prepaid, return receipt requested, or by telefacsimile to the addresses set forth at the beginning of this Agreement. A party may change its notice address by giving the other party written notice. 11. CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER California law governs the Loan Documents without regard to principles of conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction of the State and Federal courts in Santa Clara County, California. BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL. 12. GENERAL PROVISIONS 12.1 SUCCESSORS AND ASSIGNS. This Agreement binds and is for the benefit of the successors and permitted assigns of each party. Borrower may not assign this Agreement or any rights under it without Bank's prior written consent which may be granted or withheld in Bank's discretion. Bank has the right, without the consent of or notice to Borrower, to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank's obligations, rights and benefits under this Agreement. 12.2 INDEMNIFICATION. Borrower will indemnify, defend and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities asserted by any other party in connection with the transactions contemplated by the Loan Documents; and (b) all losses or Bank Expenses incurred, or paid by Bank from, following, or consequential to transactions between Bank and Borrower (including reasonable attorneys fees and expenses), except for losses caused by Bank's gross negligence or willful misconduct. A Person seeking to be indemnified under this Section shall notify Borrower of any event requiring indemnification within a reasonable time following such Person's receipt of notice of -13- commencement of any action or proceeding giving rise to a claim for indemnification hereunder, provided that (i) there shall be no obligation to so notify Borrower if an Event of Default has occurred and is continuing, (ii) neither Bank nor any such Person shall have any liability or obligation for any inadvertent failure to provide such notice, (iii) no failure to provide such notice shall affect Borrower's obligation to provide indemnity hereunder and (iv) in any event, nothing herein shall impose on Bank any duty or obligation to impair the confidentiality or sanctity of its attorney client relationship. In such proceeding, such Person shall use commercially reasonable efforts to keep Borrower reasonably informed of its defense and any settlement of any such action or proceeding and negotiations to settle or otherwise resolve any claim, provided that (i) such Person shall have the exclusive right to decide to accept or reject any settlement offer, (ii) there shall be no obligation to keep Borrower so informed if an Event of Default has occurred and is continuing, (iii) neither Bank nor any such Person shall have any liability or obligation for any inadvertent failure to keep Borrower so informed, (iv) no failure to keep Borrower so informed shall affect Borrower's obligation to provide indemnity hereunder and (v) in any event, nothing herein shall impose on Bank any duty or obligation to impair the confidentiality or sanctity of its attorney client relationship. Notwithstanding any provision in this Agreement to the contrary, the indemnity agreement set forth in this Section shall survive any termination of this Agreement and shall for all purposes continue in full force and effect. 12.3 TIME OF ESSENCE. Time is of the essence for the performance of all obligations in this Agreement. 12.4 SEVERABILITY OF PROVISION. Each provision of this Agreement is severable from every other provision in determining the enforceability of any provision. 12.5 AMENDMENTS IN WRITING, INTEGRATION. All amendments to this Agreement must be in writing and signed by Borrower and Bank. This Agreement represents the entire agreement about this subject matter, and supersedes prior negotiations or agreements. All prior agreements, understandings, representations, warranties, and negotiations between the parties about the subject matter of this Agreement merge into this Agreement and the Loan Documents. 12.6 COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, are an original, and all taken together, constitute one Agreement. 12.7 SURVIVAL. All covenants, representation s and warranties made in this Agreement continue in full force while any Obligations remain outstanding (other than for Inchoate Indemnities). The obligations of Borrower in Section 12.2 to indemnify Bank will survive until all statutes of limitations for actions that may be brought against Bank have run. 12.8 CONFIDENTIALITY. In handling any confidential information, Bank will exercise the same degree of care that it exercises for its own proprietary information, but disclosure of information may be made (i) to Bank's subsidiaries or affiliates in connection with their business with Borrower, (ii) to -14- prospective transferees or purchasers of any interest in the loans (provided, however, Bank shall use commercially reasonable efforts in obtaining such prospective transferee or purchasers written agreement to the terms of this provision), (iii) as required by law, regulation, subpoena, or other order, (iv) as required in connection with Bank's examination or audit and (v) as Bank considers appropriate exercising remedies under this Agreement. Confidential information does not include information that either: (a) is in the public domain or in Bank's possession when disclosed to Bank, or becomes part of the public domain after disclosure to Bank; or (b) is disclosed to Bank by a third party, if Bank does not know that the third party is prohibited from disclosing the information. 12.9 ATTORNEYS' FEES, COSTS AND EXPENSES. In any action or proceeding between Borrower and Bank arising out of the Loan Documents, the prevailing party will be entitled to recover its reasonable attorneys' fees and other reasonable costs and expenses incurred, in addition to any other relief to which it may be entitled. 13. DEFINITIONS 13.1 DEFINITIONS. In this Agreement: "ACCOUNTS" are all existing and later arising accounts, contract rights, and other obligations owed Borrower in connection with its sale or lease of goods (including licensing software and other technology) or provision of services, all credit insurance, guaranties, other security and all merchandise returned or reclaimed by Borrower and Borrower's Books relating to any of the foregoing. "AFFILIATE" of a Person is a Person that owns or controls directly or indirectly the Person, any Person that controls or is controlled by or is under common control with the Person, and each of that Person's senior executive officers, directors, partners and, for any Person that is a limited liability company, that Person's managers and members. "BANK EXPENSES" are all audit fees and expenses and reasonable costs and expenses (including reasonable attorneys' fees and expenses) for preparing, negotiating, administering, defending and enforcing the Loan Documents (including appeals or Insolvency Proceedings). "BORROWER'S BOOKS" are all Borrower's books and records including ledgers, records regarding Borrower's assets or liabilities, the Collateral, business operations or financial condition and all computer programs or discs or any equipment containing the information. "BORROWING BASE" shall mean: (A) up to 75% of Eligible Accounts as determined and confirmed by Bank from Borrower's most recent Borrowing Base Certificate; provided, however, that Bank may lower the percentage of the Borrowing Base after performing an audit of Borrower's Collateral in Bank's good faith business judgment; and (B) up to 25% of Eligible Inventory, provided that Advances hereunder based on Eligible Inventory shall at no time exceed the lesser of (i) $1,000,000 or (ii) 33% of the amount from clause (A) above, as applicable from time to time. -15- "BUSINESS DAY" is any day that is not a Saturday, Sunday or a day on which the Bank is closed. "CLOSING DATE" is the date of this Agreement. "CODE" is the Uniform Commercial Code, as applicable. "COLLATERAL" is the property described on Exhibit A. "COMMITTED REVOLVING LINE" shall mean a credit facility for the making of Revolving Advances in the aggregate principal amount of $3,000,000. "CONTINGENT OBLIGATION" is, for any Person, any direct or indirect liability, contingent or not, of that Person for (i) any indebtedness, lease, dividend, letter of credit or other obligation of another such as an obligation directly or indirectly guaranteed, endorsed, co-made, discounted or sold with recourse by that Person, or for which that Person is directly or indirectly liable; (ii) any obligations for undrawn letters of credit for the account of that Person; and (iii) all obligations from any interest rate, currency or commodity swap agreement, interest rate cap or collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; but "Contingent Obligation" does not include endorsements in the ordinary course of business. The amount of a Contingent Obligation is the stated or determined amount of the primary obligation for which the Contingent Obligation is made or, if not determinable, the maximum reasonably anticipated liability for it determined by the Person in good faith; but the amount may not exceed the maximum of the obligations under the guarantee or other support arrangement. "COPYRIGHTS" are all copyright rights, applications or registrations and like protections in each work or authorship or derivative work, whether published or not (whether or not it is a trade secret) now or later existing, created, acquired or held. "CREDIT EXTENSION" is each Revolving Advance and each other extension of credit or credit accommodation by Bank for Borrower's benefit. "DEFAULT" shall mean any event or occurrence which with the passing of time or the giving of notice or both would become an Event of Default hereunder. "EFFECTIVE DATE" is the date Bank executes this Agreement. "ELIGIBLE ACCOUNTS" are Accounts in the ordinary course of Borrower's business that meet all Borrower's representations and warranties in Section 5.2; but Bank may change eligibility standards by giving Borrower notice. Unless Bank agrees otherwise in writing, Eligible Accounts will not include: (a) Accounts that the account debtor has not paid within 90 days of invoice date; (b) Accounts for an account debtor, 50% or more of whose Accounts have not been paid within 90 days of invoice date; (c) Credit balances over 90 days from invoice date; (d) Accounts for an account debtor, including Affiliates, whose total obligations to Borrower exceed 25% of all Accounts, for the amounts that exceed that percentage, unless the Bank approves in writing; -16- (e) Accounts for which the account debtor does not have its principal place of business in the United States; (f) Accounts for which the account debtor is a federal, state or local government entity or any department, agency, or instrumentality, other than for account debtor consisting of a hospital, as long as the Bank is able to perfect its Lien therein through the filing of a UCC-1 financing statement in the appropriate governmental filing office, provided Bank reserves the right to make an Assignment of Claims filing, or other equivalent filing under any other applicable filing or registration scheme, which Bank in its discretion may do; (g) Accounts for which Borrower owes the account debtor, but only up to the amount owed (sometimes called "contra" accounts, accounts payable, customer deposits or credit accounts); (h) Accounts for demonstration or promotional equipment, or in which goods are consigned, sales guaranteed, sale or return, sale on approval, bill and hold, or other terms if account debtor's payment may be conditional; (i) Accounts for which the account debtor is Borrower's Affiliate, officer, employee, or agent; (j) Accounts in which the account debtor disputes liability or makes any claim and Bank believes there may be a basis for dispute (but only up to the disputed or claimed amount), or if the Account Debtor is subject to an Insolvency Proceeding, or becomes insolvent, or goes out of business; and (k) Accounts for which Bank reasonably determines collection to be doubtful. "ELIGIBLE INVENTORY" means Inventory that Bank deems acceptable, in its discretion, for the purpose of making of Advances hereunder. "EQUIPMENT" is all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments in which Borrower has any interest. "ERISA" is the Employment Retirement Income Security Act of 1974, and its regulations. "GAAP" is generally accepted accounting principles, consistently applied. "GUARANTOR" is any present or future guarantor of the Obligations. "INCHOATE INDEMNITIES" shall mean indemnity obligations of the Borrower hereunder for which no claim or applicable covered occurrence or event under any applicable indemnity provision hereof has yet arisen, to the knowledge of Bank, even though the indemnity provisions hereof shall continue to remain enforceable contractual provisions with respect to any such potential claims or otherwise regarding any such occurrences or events. "INDEBTEDNESS" is (a) indebtedness for borrowed money or the deferred price of property or services, such as reimbursement and other obligations for surety bonds and letters of credit, (b) obligations evidenced by notes, bonds, debentures or similar instruments, (c) capital lease obligations and (d) Contingent Obligations. -17- "INSOLVENCY PROCEEDING" are proceedings by or against any Person under the United States Bankruptcy Code, or any other bankruptcy or insolvency law, including assignments for the benefit of creditors, compositions, extensions generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief. "INTELLECTUAL PROPERTY" is: (a) Copyrights, Trademarks, Patents, and Mask Works including amendments, renewals, extensions, and all licenses or other rights to use and all license fees and royalties from the use; (b) Any trade secrets and any intellectual property rights in computer software and computer software products now or later existing, created, acquired or held; (c) All design rights which may be available to Borrower now or later created, acquired or held; (d) Any claims for damages (past, present or future) for infringement of any of the rights above, with the right, but not the obligation, to sue and collect damages for use or infringement of the intellectual property rights above; All proceeds and products of the foregoing, including all insurance, indemnity or warranty payments. "INVENTORY" is present and future inventory in which Borrower has any interest, including merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products intended for sale or lease or to be furnished under a contract of service, of every kind and description now or later owned by or in the custody or possession, actual or constructive, of Borrower, including inventory temporarily out of its custody or possession or in transit and including returns on any accounts or other proceeds (including insurance proceeds) from the sale or disposition of any of the foregoing and any documents of title. "INVESTMENT" is any beneficial ownership of (including stock, partnership interest or other securities) any Person, or any loan, advance or capital contribution to any Person. "LIEN" is a mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance. "LOAN DOCUMENTS" are, collectively, this Agreement, any note, or notes or guaranties or third party suretyship obligations in favor of Bank executed by Borrower or other Persons, as applicable, and any other present or future agreement between Borrower and/or for the benefit of Bank in connection with this Agreement, all as amended, extended or restated. "MASK WORKS" are all mask works or similar rights available for the protection of semiconductor chips, now owned or later acquired. "MATERIAL ADVERSE CHANGE" is described in Section 8.3. "OBLIGATIONS" are debts, principal, interest, Bank Expenses and other amounts Borrower owes Bank now or later, including cash management services, letters of credit and foreign exchange contracts, if any and including interest accruing after Insolvency Proceedings begin and debts, liabilities, or obligations of Borrower assigned to Bank. -18- "PATENTS" are patents, patent applications and like protections, including improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same. "PERMITTED INDEBTEDNESS" is: (a) Borrower's indebtedness to Bank under this Agreement or any other Loan Document; (b) Indebtedness existing on the Closing Date and shown on the Schedule; (c) Subordinated Debt; (d) Indebtedness to trade creditors incurred in the ordinary course of business; and (e) Indebtedness secured by Permitted Liens. "PERMITTED INVESTMENTS" are: (a) Investments shown on the Schedule and existing on the Closing Date, provided that Investments in a Subsidiary shall be allowed in the ordinary course of business and shall be consistent in manner, scope and magnitude as made on and prior to the date hereof; (b) (i) marketable direct obligations issued or unconditionally guaranteed by the United States or its agency or any State maturing within 1 year from its acquisition, (ii) commercial paper maturing no more than 1 year after its creation and having the highest rating from either Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii) Bank's certificates of deposit issued maturing no more than 1 year after issue; (c) extensions of trade credit by Borrower or by any Subsidiary in the ordinary course of business consistent with past business practices of Borrower or Subsidiary, as applicable (provided that trade credit that Borrower supplies to its Subsidiary shall in all cases be consistent with the standards set forth in clause (a) hereof). (d) Investments (including debt obligations) received in connection with the bankruptcy or reorganization of suppliers and customers and in settlement of delinquent obligations of and other disputes with, customers and suppliers arising in the ordinary course of business; (e) promissory notes acquired in connection with the disposition of assets permitted under Sect ion 7.1; and (f) Additional Investments in an aggregate amount not to exceed $50,000 at any time outstanding, provided that any such Investment may not be made while a Default or an Event of Default has occurred and is continuing or would otherwise arise upon the making thereof. "PERMITTED LIENS" are: (a) Liens existing on the Closing Date and shown on the Schedule or arising under this Agreement or other Loan Documents; (b) Liens for taxes, fees, assessments or other government charges or levies, either not delinquent or being contested in good faith and for which Borrower maintains adequate reserves on its Books, if they have no priority over any of Bank's security interests; -19- (c) Purchase money Liens (i) on Equipment acquired or held by Borrower or its Subsidiaries incurred for financing the acquisition of the Equipment, or (ii) existing on equipment when acquired, if the Lien is confined to the property and improvements and the proceeds of the equipment; (d) Non-exclusive licenses or non-exclusive sublicenses granted in the ordinary course of Borrower's business and, with respect to any licenses where Borrower is the licensee, any interest or title of a licensor or under any such license or sublicense, if the licenses and sublicenses permit granting Bank a security interest; (e) Leases or subleases entered into in the ordinary course of Borrower's business, including in connection with Borrower's leased premises or leased property; (f) Liens incurred in the extension, renewal or refinancing of the indebtedness secured by Liens described in (a) through (c), but any extension, renewal or replacement Lien must be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness may not increase; (g) carriers', warehousemen's, mechanics', materialmen's, repairmen's, worker's compensation, employment insurance, social security or other similar Liens relating to statutory obligations arising in the ordinary course of business which are not delinquent or remain payable without penalty or which are being contested in good faith and by appropriate proceedings (provided, however, that such appropriate proceedings do not involve any substantial danger of the sale, forfeiture or loss of any material item of Collateral or Collateral which in the aggregate is material to Borrower and that Borrower has adequately bonded such Lien or reserves sufficient to discharge such Lien have been provided on the books of Borrower) (h) Liens arising from judgments, decrees or attachments which do not constitute an Event of Default; (i) easements, rights-of-way, restrictions, minor defects or irregularities in title and other similar charges or encumbrances not interfering in any material respect with the ordinary conduct of the business of Borrower; and (j) banker's Liens, rights of setoff and similar Liens incurred on deposits made in the ordinary course of business, subject, however, in each case to the provisions of any account control agreement entered into by and between Bank and the depository institution with respect to any such deposits and accounts. "PERSON" is any individual, sole proprietorship, partnership, limited liability company, joint venture, company association, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or government agency. "PRIME RATE" is Bank's most recently announced "prime rate," even if it is not Bank's lowest rate. "RESPONSIBLE OFFICER" is each of the Chief Executive Officer, the President, the Chief Financial Officer and the Controller of Borrower. "REVOLVING ADVANCE" or "REVOLVING ADVANCES" is a loan advance (or advances) under the Committed Revolving Line. "REVOLVING MATURITY DATE" is December 31, 2004. -20- "RIGHTS", as applied to the Collateral, means the Borrower's rights and interests in, and powers with respect to, that Collateral, whatever the nature of those rights, interests and powers and, in any event, including Borrower's power to transfer rights in such Collateral to Bank. "SCHEDULE" is any attached schedule of exceptions. "SUBORDINATED DEBT" is debt incurred by Borrower subordinated to Borrower's indebtedness owed to Bank and which is reflected in a written agreement in a manner and form acceptable to Bank and approved by Bank in writing. "SUBSIDIARY" is for any Person, or any other business entity of which more than 50% of the voting stock or other equity interests is owned or controlled, directly or indirectly, by the Person or one or more Affiliates of the Person. As used herein, Subsidiary shall mean a Subsidiary of the Borrower. "TANGIBLE NET WORTH" is, on any date, the book value of Borrower minus the aggregate amounts attributable to intangible items plus Subordinated Debt. "TRADEMARKS" are trademark and servicemark rights, registered or not, applications to register and registrations and like protections, and the entire goodwill of the business of Assignor connected with the trademarks. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the date first above written. BORROWER: VASCULAR SOLUTIONS, INC. By: -------------------------------- Title: ----------------------------- BANK: SILICON VALLEY BANK By: -------------------------------- Title: ----------------------------- Effective Date: __________________________ -21- EXHIBIT A The Collateral consists of all of Borrower's right, title and interest in and to the following personal property of Borrower: All goods and equipment now owned or hereafter acquired, including, without limitation, all machinery, fixtures, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing, wherever located; All inventory, now owned or hereafter acquired, including, without limitation, all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products including such inventory as is temporarily out of Borrower's custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above; All contract rights and general intangibles now owned or hereafter acquired, including the Intellectual Property (as defined below) only, however, to the extent and subject to the limitations set forth in the Exclusion Clause (as defined below); All now existing and hereafter arising accounts, contract rights, payment intangibles, royalties, license rights and all other forms of obligations owing to Borrower arising out of the sale or lease of goods, the licensing of technology or the rendering of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower; All documents, cash, deposit accounts, securities, securities entitlements, securities accounts, investment property, financial assets, letters of credit, letter-of-credit rights, commercial tort claims, certificates of deposit, instruments and chattel paper now owned or hereafter acquired and Borrower's Books relating to the foregoing; and All Borrower's Books relating to the foregoing and any and all claims, rights and interests in any of the above and all substitutions for, additions and accessions to and proceeds thereof. Notwithstanding the foregoing, the Collateral shall not include any Intellectual Property, provided that if a judicial authority (including a U.S. Bankruptcy Court) holds that a security interest in the underlying Intellectual Property is necessary to have a security interest in such items that are proceeds of the Intellectual Property consisting of payment intangibles, accounts, license revenues, or general intangibles relating to rights to payment arising therefrom or relating thereto, then in such circumstance, the Collateral shall automatically, and effective as of the Closing Date, include the Intellectual Property only to the extent necessary to permit perfection of Bank's security interest in such proceeds, including, without limitation, payment intangibles, accounts, license revenues, or general intangibles relating to rights to payment (the foregoing is referred to herein collectively as the "Exclusion Clause"). Further, Borrower and Bank are parties to that certain Negative Pledge Agreement, whereby Borrower, in connection with Bank's loans, has agreed, among other things, not to sell, transfer, assign, mortgage, pledge, lease, grant a security interest in, or encumber, any of its Intellectual Property, without the Bank's prior written consent, other than as may be permitted thereunder or hereunder. The term "Intellectual Property" as used herein shall mean the following: Borrower's right, title or interest, whether now owned or hereafter acquired, in and to any intellectual property rights of Borrower of any nature or character, including without limitation, and whether domestic or foreign, the following: (i) any copyrights and copyright applications, whether registered or unregistered, copyright registration and like protection in each work of authorship and derivative work thereof, whether published or unpublished, and whether said copyrights are statutory or arise under common law, and all rights, claims and demands in any way related to any such copyrights or works, including any rights to sue for past, present or future infringement, and any rights of renewal and extension of copyrights; (ii) any patents, patent applications, patent rights and like protections and any licenses relating to any of the foregoing, and any improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part thereof and any rights to sue for past present or future infringement thereof and any rights arising therefrom and pertaining thereto; (iii) any state (including common law), federal and foreign trademarks, service marks and trade names, and applications for registration of such trademarks, service marks and trade names, and any licenses relating to any of the foregoing, whether registered or unregistered and wherever registered, any rights to sue for past, present or future infringement of unconsented use thereof, all rights arising therefrom and pertaining and any reissues, extensions and renewals thereof and the goodwill of the business of Borrower connected with and symbolized by any of the foregoing; (iv) any trade secrets, trade dress, trade styles, logos, other source of business identifiers, mask-works, mask-work registrations or mask-work applications, integrated circuit masks, software, circuit designs and documentation relating thereto, and the goodwill of the business of Borrower connected with and symbolized by any of the foregoing, including, without limitation, any rights to unpatented inventions, know-how, and operating manuals, including any rights to sue for past, present or future infringement or unconsented use thereof, all rights arising therefrom and pertaining thereto, provided that with respect to any and all of the foregoing, the term "Intellectual Property" shall not include any proceeds thereof (other than proceeds in the direct form of Intellectual Property) and specifically, without limitation, and regardless of any of the foregoing, the term "Intellectual Property" shall NOT include any payment intangibles, accounts, license revenues, or general intangibles relating to rights to payment arising therefrom or relating thereto 2 EXHIBIT B LOAN PAYMENT/ADVANCE REQUEST FORM DEADLINE FOR SAME DAY PROCESSING IS 12:00 P.S.T.

EXHIBIT C BORROWING BASE CERTIFICATE

EXHIBIT D COMPLIANCE CERTIFICATE

Schedule to Loan and Security Agreement --------------------------------------- The exact correct corporate name of Borrower is (attach a copy of the formation documents, E.G., articles, partnership agreement): Vascular Solutions, Inc. Borrower's State of formation: Minnesota Borrower has operated under only the following other names (if none, so state): None All other address at which the Borrower does business are as follows (attach additional sheets if necessary and include all warehouse addresses): See Representations and Warranties dated December 10, 2003. Borrower has deposit accounts and/or investment accounts located only at the following institutions: See Representations and Warranties dated December 10, 2003. List Acct. Numbers: See Representations and Warranties dated December 10, 2003. Liens existing on the Closing Date and disclosed to and accepted by Bank in writing: None. Investments existing on the Closing Date and disclosed to and accepted by Bank in writing: Vascular Solutions, GmbH - Balances as of Novemer 30, 2003 - Investment in Subsidiary $21,347, Intercompany receivable $1,429,955, Intercompany Note Receivable $154,350 Subordinated Debt: Indebtedness on the Closing Date and disclosed to and consented to by Bank in writing: None. The following is a list of the Borrower's copyrights (including copyrights of software) which are registered with the United States Copyright Office. (Please include name of the copyright and registration number and attach a copy of the registration): No list. We copyright all marketing materials in the normal course of business. The following is a list of all software which the Borrower sells, distributes or licenses to others, which is not registered with the United States Copyright Office. (Please include versions which are not registered: None. The following is a list of all of the Borrower's patents which are registered with the United States Patent Office. (Please include name of the patent and registration number and attach a copy of the registration.): _See patent and trademark sheet. The following is a list of all of the Borrower's patents which are pending with the United States Patent Office. (Please include name of the patent and a copy of the application.): See patent and trademark sheet. The following is a list of all of the Borrower's registered trademarks. (Please include name of the trademark and a copy of the registration.): See patent and trademark sheet. Borrower is not subject to litigation which would have a material adverse effect on the Borrower's financial condition, except the following (attach additional comments, if needed): See Diomed suit. Tax ID Number: 41-1859679 Organizational Number, if any: 9L-421 EX-14 4 vasc041035_ex14.txt EXHIBIT 14 VASCULAR SOLUTIONS, INC. CODE OF BUSINESS CONDUCT AND ETHICS Vascular Solutions is committed to high standards of legal and ethical business conduct. This Code of Business Conduct and Ethics summarizes the legal, ethical and regulatory standards that Vascular Solutions imposes upon its business conduct and is a reminder to our directors, officers and employees, of the seriousness of that commitment. Compliance with this Code is required for every Vascular Solutions employee. While this Code imposes additional and specific internal requirements on the Company and the directors, officers and employees of Vascular Solutions, in no manner is this Code intended to create any additional legal obligations for either the company or its employees. The Company reserves the right to amend this Code at any time. INTRODUCTION Our business is becoming increasingly complex, both in terms of the geographies in which we function and the laws with which we must comply. To help you understand what is expected of you and to carry out your responsibilities, we have created this Code of Business Conduct and Ethics. Additionally, we have designated the Vice President of Regulatory Affairs as the Company's Ethics Officer to oversee adherence to the Code. This Code is not intended to be a comprehensive guide to all of our policies or to all your responsibilities under law or regulation. It provides general parameters to help you resolve the ethical and legal issues you encounter in conducting our business. Think of this Code as a guideline, or a minimum requirement, that must always be followed. If you have any questions about anything in the Code or appropriate actions in light of the Code, you may contact the Ethics Officer or the Chair of the Audit Committee. We expect each of our directors, officers and employees to read and become familiar with the ethical standards described in this Code and to affirm your agreement to adhere to these standards by signing the Compliance Certificate that appears at the end of this Code. Violations of the law, our corporate policies, or this Code may lead to disciplinary action, including immediate dismissal. I. WE INSIST ON HONEST AND ETHICAL CONDUCT BY ALL OF OUR DIRECTORS, OFFICERS, EMPLOYEES AND OTHER REPRESENTATIVES We have built our business based on a commitment to delivering excellence in vascular medical products -- not only quality vascular products for physicians that improve the lives of patients, but also quality employees and representatives who adhere to high standards of honesty, ethics and fairness in our dealings with all of our business contacts. We place a high value on the integrity of our directors, our officers and our employees and demand this level of integrity in all our dealings. We insist on not only ethical dealings with others, but on the ethical handling of actual or apparent conflicts of interest between personal and professional relationships. FAIR DEALING You are required to deal honestly and fairly with our customers, suppliers, competitors and other third parties. We market our products fairly and vigorously based on our honesty, creativity and ingenuity and the proven quality and reliability of the products. Serving our customers effectively is our most important goal--in the eyes of the customer you are Vascular Solutions. In our dealings with customers, suppliers, and governmental regulatory bodies we: o prohibit bribes, kickbacks or any other form of improper payment, direct or indirect, to any representative of government, labor union, customer or supplier in order to obtain a contract, some other commercial benefit or government action; o prohibit our directors, officers and employees from accepting any bribe, kickback or improper payment from anyone; o prohibit gifts or favors of more than nominal value to or from our customers or suppliers; o limit marketing and client entertainment expenditures to those that are necessary, prudent, job-related and consistent with our policies; o require clear and precise communication in our contracts, our advertising, our literature, our public statements, and our statements to government officials and seek to eliminate misstatement of fact or misleading impressions; o reflect accurately on all invoices to customers the sale price and terms of sales for products sold; o protect all proprietary data our customers or suppliers provide to us as reflected in our agreements with them; o prohibit our representatives from otherwise taking unfair advantage of our customers or suppliers, or other third parties, through manipulation, concealment, abuse of privileged information or any other unfair-dealing practice. CONFLICTS OF INTEREST; CORPORATE OPPORTUNITIES Our directors, officers and employees should not be involved in any activity that creates or gives the appearance of a conflict of interest between their personal interests and the interests 2 of Vascular Solutions. In particular, without the specific permission of our Ethics Officer or the Board of Directors, no director, officer or employee shall: o be a consultant to, or a director, officer or employee of, or otherwise operate an outside business that: >> markets products in competition with our current or potential products; >> supplies products or services to Vascular Solutions; or >> purchases products from Vascular Solutions; o have any financial interest, including significant stock ownership, in any entity with which we do business that might create or give the appearance of a conflict of interest; o seek or accept any personal loan or services from any entity with which we do business, except from financial institutions or service providers offering similar loans or services to third parties under similar terms in the ordinary course of their respective businesses; o be a consultant to, or a director, officer or employee of, or otherwise operate an outside business if the demands of the outside business would interfere with the director's, officer's or employee's responsibilities to us, (if in doubt, consult your supervisor or the Ethics Officer); o accept any personal loan or guarantee of obligations from Vascular Solutions, except to the extent such arrangements are legally permissible; or o conduct business on behalf of Vascular Solutions with immediate family members, which include spouses, children, parents, siblings and persons sharing the same home whether or not legal relatives. Directors, officers, and employees must notify the Ethics Officer or the Chair of our Audit Committee of the existence of any actual or potential conflict of interest. CONFIDENTIALITY AND CORPORATE ASSETS Our directors, officers and employees are entrusted with our confidential information and with the confidential information of our suppliers, customers or other business partners. This information may include (1) technical or scientific information about current and future products, services or research, (2) business or marketing plans or projections, (3) earnings and other internal financial data, (4) personnel information, (5) supply and customer lists and (6) other non-public information that, if disclosed, might be of use to our competitors, or harmful to our suppliers, customers or other business partners. This information is our property, or the property of our suppliers, customers or business partners and in many cases was developed at great expense. Our directors, officers and employees shall: 3 o Not discuss confidential information with or in the presence of any unauthorized persons, including family members and friends; o Use confidential information only for our legitimate business purposes and not for personal gain; o Not disclose confidential information to third parties. o Not use Vascular Solutions property or resources for any personal benefit or the personal benefit of anyone else. Vascular Solutions property includes the Vascular Solutions internet, email, and voicemail services, which should be used only for business related activities, and which may be monitored by Vascular Solutions at any time without notice. Please see your employment agreement or confidentiality agreement to review all responsibilities in this area. II. WE PROVIDE FULL, FAIR, ACCURATE, TIMELY AND UNDERSTANDABLE DISCLOSURE We are committed to providing our shareholders and investors with full, fair, accurate, timely and understandable disclosure in the reports that we file with the Securities and Exchange Commission. To this end, our directors, officers and employees shall: o not make false or misleading entries in our books and records for any reason; o not condone any undisclosed or unrecorded bank accounts or assets established for any purpose; o comply with generally accepted accounting principles at all times; o notify our Director of Finance if there is an unreported transaction; o maintain a system of internal accounting controls that will provide reasonable assurances to management that all transactions are properly recorded; o maintain books and records that accurately and fairly reflect our transactions; o prohibit the establishment of any undisclosed or unrecorded funds or assets; o maintain a system of internal controls that will provide reasonable assurances to our management that material information about Vascular Solutions is made known to management, particularly during the periods in which our periodic reports are being prepared; o present information in a clear and orderly manner and avoid the use of unnecessary legal and financial language in our periodic reports; and 4 o not communicate to the public any nonpublic information except through our Director of Finance or Chief Executive Officer. III. WE COMPLY WITH ALL LAWS, RULES AND REGULATIONS We will comply with all laws and governmental regulations that are applicable to our activities, and expect all our directors, officers and employees to obey the law. Specifically, we are committed to: o complying with all applicable state and federal securities laws; o complying with all applicable state, federal and international laws concerning the manufacture, distribution and sale of medical device including those concerning: * reporting and investigating complaints and adverse events which may be associated with our products * the design, manufacture and evaluation of our products o complying with all applicable laws designed to protect the confidentiality of patient records and health information; o maintaining a safe and healthy work environment; o promoting a workplace that is free from discrimination, intimidation, or harassment based on race, color, religion, sex, age, national origin or disability; o the principles of fair competition and laws prohibiting restraints of trade and other unfair trade practices by prohibiting inaccurate or misleading representation of competitors' operations or products or obtaining, through improper means, confidential commercial information concerning our competitors; o conducting our activities in full compliance with all applicable environmental laws; o keeping the political activities of our directors, officers and employees separate from our business; o prohibiting any illegal payments, gifts, or gratuities to any government officials or political party; o prohibiting the unauthorized use, reproduction, or distribution of any third party's trade secrets, copyrighted information or confidential information; and o prohibiting the sale or export, either directly or through our representatives, of our products to countries where our products are not approved for sale. 5 Our directors, officers and employees are prohibited from trading our securities while in possession of material, nonpublic ("INSIDE") information about Vascular Solutions. Our Insider Trading Policy describes the nature of inside information and the related restrictions on trading. REPORTING AND EFFECT OF VIOLATIONS Compliance with this code of conduct is, first and foremost, the individual responsibility of every director, officer and employee. We attempt to foster a work environment in which ethical issues and concerns may be raised and discussed with supervisors or with others without the fear of retribution. It is our responsibility to provide a system of reporting and access when you wish to report a suspected violation, or to seek counseling, and the normal chain of command cannot, for whatever reason, be used. ADMINISTRATION Our Board of Directors and Audit Committee have established the standards of business conduct contained in this Code and oversees compliance with this Code. They have also designated the Vice President of Regulatory Affairs to the position of Ethics Officer to ensure adherence to the Code. While serving in this capacity, the Ethics Officer reports directly to the Board of Directors. Training on this code will be included in the orientation of new employees and provided to existing directors, officers, and employees on an on-going basis. To ensure familiarity with the Code, directors, officers, and employees may be asked to read the Code and sign a Compliance Certificate periodically. REPORTING VIOLATIONS AND QUESTIONS Directors, officers, and employees must report, in person or in writing, any known or suspected violations of laws, governmental regulations or this Code to either the Ethics Officer or the Chair of the Audit Committee of our Board of Directors. Additionally, directors, officers, and employees may contact the Ethics Officer or the Chair of the Audit Committee with a question or concern about this Code or a business practice. Any questions or violation reports will be addressed immediately and seriously, and can be made anonymously. If you feel uncomfortable reporting suspected violations to these individuals, you may report matters to Dorsey & Whitney LLP, our outside legal counsel. The names, addresses and telephone numbers of these individuals are listed in the attachment to this Code. WE WILL NOT ALLOW ANY RETALIATION AGAINST A DIRECTOR, OFFICER OR EMPLOYEE WHO ACTS IN GOOD FAITH IN REPORTING ANY VIOLATION. Our Ethics Officer will investigate any reported violations and will determine an appropriate response, including corrective action and preventative measures, involving the Chair of the Audit Committee or Chief Executive Officer when required. All reports will be treated confidentially to every extent possible. 6 CONSEQUENCES OF A VIOLATION. Directors, officers and employees that violate any laws, governmental regulations or this Code will face appropriate, case specific disciplinary action, which may include demotion or immediate discharge. 7 NAMES AND ADDRESSES (AS OF JULY 1, 2003) REPORTING CONTACTS: ETHICS OFFICER: THE CHAIR OF OUR AUDIT COMMITTEE: Name: Deborah Jensen Name: Richard Nigon Address: 6464 Sycamore Court Address: 920 Second Avenue South Minneapolis, MN 55369 Minneapolis, MN 55402 Phone: (763) 656-4349 Phone: (612) 341-6250 E-mail: djensen@vascularsolutions.com E-mail: dnigon@mjsk.com ADDITIONAL REPORTING CONTACT: OUR OUTSIDE COUNSEL: DORSEY & WHITNEY LLP Name: Tim Hearn Address: 50 South Sixth Street Suite 1500 Minneapolis, MN 55402 Phone: (612) 340-7802 E-mail: hearn.tim@dorseylaw.com 8 COMPLIANCE CERTIFICATE I have read and understand the Vascular Solutions Code of Business Conduct and Ethics (the "CODE") and agree to adhere in all respects to the ethical standards described in the Code. I understand that this Code does not contain all of Vascular Solutions' policies and that I understand that any violation of the Code will subject me to appropriate disciplinary action, which may include demotion or immediate discharge. I certify to Vascular Solutions that I am not in violation of the Code, unless I have noted such violation in a signed Statement of Exceptions attached to this Compliance Certificate. Date: __________________________________ ___________________________________ Name: _____________________________ Title/Position:____________________ CHECK ONE OF THE FOLLOWING: |_| A Statement of Exceptions is attached. |_| No Statement of Exceptions is attached. 9 VASCULAR SOLUTIONS CORPORATE COMPLIANCE PROGRAM REPORTING FORM Date of Report: ___________________________ Please state the nature of your concern and describe the event or circumstance giving rise to this compliance report. Please be as specific as possible. Attach extra sheets if more space is required. This form may be submitted anonymously. While supplying your name may assist in the investigation of your report, you are under no obligation to disclose your identity. It is an explicit violation of Vascular Solutions policies to retaliate in any way against an employee or officer who in good faith reports any actual or potential violation of applicable laws, rules, regulations, or corporate policies and procedures. Please submit the completed form to either the Ethics Officer or the Chairman of the Ethics Committee. If you wish to provide your name, please do so below. ________________________________________________________________________________ Name Phone Number EX-21 5 vasc041035_ex21.txt EXHIBIT 21 SUBSIDIARIES Vascular Solutions, GmbH (Germany) EX-23.1 6 vasc041035_ex23-1.txt EXHIBIT 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-54164) of our report dated January 16, 2004, with respect to the consolidated financial statements of Vascular Solutions, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 2003. Our audits also included the financial statement schedule of Vascular Solutions, Inc. listed in Item 15(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Ernst & Young LLP Minneapolis, Minnesota February 26, 2004 EX-31 7 vasc041035_ex31-1.txt EXHIBIT 31.1 CERTIFICATIONS I, Howard Root, certify that: 1. I have reviewed this annual report on Form 10-K of Vascular Solutions, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 19, 2004 By: /s/ Howard Root ----------------------- Howard Root CHIEF EXECUTIVE OFFICER EX-31 8 vasc041035_ex31-2.txt EXHIBIT 31.2 CERTIFICATIONS I, James Hennen, certify that: 1. I have reviewed this annual report on Form 10-K of Vascular Solutions, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 19, 2004 By: /s/ James Hennen ----------------------- James Hennen CHIEF FINANCIAL OFFICER EX-32 9 vasc041035_ex32-1.txt EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. ss. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Vascular Solutions, Inc. (the "Company") on Form 10-K for the period ended December 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Howard Root, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Howard Root ------------------------------------------ Howard Root Chief Executive Officer February 19, 2004 EX-32 10 vasc041035_ex32-2.txt EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. ss. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Vascular Solutions, Inc. (the "Company") on Form 10-K for the period ended December 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James Hennen, Chief Financial Officerr of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ James Hennen ------------------------------------------ James Hennen Chief Financial Officer February 19, 2004 -----END PRIVACY-ENHANCED MESSAGE-----

FORM 10-K

For the fiscal year ended December 31, 2003

OR

ITEM 2. PROPERTIES

PART II

RISK FACTORS

PART III

PART IV

SIGNATURES

SCHEDULE II

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

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